Empirical Study Of The Effect Of Internal Control Quality And Audit Quality On Real Earnings Management

Along with 20 years of development, China so far has made considerable progress in building a multi-level capital market including main-board market, SMEs board, GEM board, new OTC market, the regional equity market and other multi-level capital market system. According to Securities Regulatory Commission’s annual report, by the end of 2013 there are 2489 listed companies in Shanghai and Shenzhen Stock Exchange market whose total market value amount to 23.91 trillion Yuan. This means that China’s capital market has a considerable size now.In the capital market, earnings information as an important part of the financial information can provide decision-useful information to investors, creditors, and other users of financial reports. However, empirical studies have found that real activities earnings management not only adversely affects the level of business investment, enterprise performance and value, but also misleads investors’ judgments and decisions, damages the efficient allocation of market resources. Jensen,Meckling(1976) stated that audit and formal control systems can reduce opportunistic behavior of companies’ management. With that, this paper study whether internal and external corporate governance roles that contain internal control and CPA audit can restrain real earnings management.This paper consists of introduction and the subsequent four parts. In the introduction, this paper described the research background and significance, research methods and content, innovation, and finding starting point through combing related literatures. These literatures related to the impact of internal control quality and audit quality on the real earnings management. In the first part, this paper defined concepts of internal control quality, audit quality and real earnings management, put forward the research hypothesis based on the incomplete contract theory and principal-agent theory. The second part contains a detailed description of the data sources and sample selection, variables measurement and model design. The third part using 2013 Shanghai A-share listed non-financial companies data to test the hypothesis. Using SPSS20.0 for statistics description, correlation analysis and regression analysis, this paper found that internal control quality can significantly restrain real total earnings management, abnormaloperating cash flow, abnormal production costs and abnormal discretionary expenses; CPA audit quality can significantly reduce real total earnings management, abnormal production costs and discretionary expenses; in the case of poor internal control quality, CPA audit quality can effectively suppress the real total earnings management, abnormal production costs. In order to enhance the robustness of the conclusions, this paper considered the constant term when using real earnings management model to measure real earnings management and standardized the three individual variables to measure real total earnings management, finding that the main results are consistent with the above findings. The fourth part describes the empirical conclusions and deficiencies, and put forward some suggestions, those suggestions include: promoting the accounting firms become bigger and stronger steadily, and the accounting firms should disclose corporate anomaly actively; Corporate senior management should promote the construction of internal control actively and make full use of the CPA audit of internal control; Suppress real earnings management need to take full advantage of the internal control and CPA audit.The innovation of this paper is that reversed the negative indicators and standardized all financial indicators according to different industries when using principal component analysis method to calculate comprehensive score of internal control quality.