An Empirical Study On The Relationship Of Internal Control And Auditing Controlling Earnings Management

In2001, the U.S. energy company Enron’s filed for bankruptcy protection. In2002, the WorldCom’s accounting scandal erupted. These series of events completely blow to the American investors’ confidence in listed companies and damage the order of the capital market. In order to better regulate the capital market and revive the American people’s confidence in capital markets, the United States enacted the famous "Sarbanes-Oxley Act" in July2002:The U.S. listed companies must disclose internal Control self-assessment report and the Internal Control audit report which is attested by the auditor to the public. Since then, it shows that the America’s Internal Control information disclosure entered into the mandatory disclosure era.False accounting events of China’s capital market is also frequent, the leading role of abandonment event abandonment company has been called "China’s first blue chips" in China, in2001it was exposed by the fictitious financial statements, and its high profits is done through a series of fraud, and the outbreak of this matter will have to let us make reflection on China’s capital market supervision system. On the one hand the regulation of listed companies in China is from the national regulation, and the regulation is mainly external auditor from the market. Listed company audited financial report issued to confirm the authenticity of the financial statements by hiring external auditors every year, to a certain extent, it can guarantee the authenticity of the corporate finance, but there is auditors and the enterprise joint fraud, the auditor cannot undertake audit responsibility, abandonment event occurred, the auditor did not do their responsibility.On the one hand the fraud of listed companies can make the investors suffer heavy losses, and make investors lose faith in the capital market, to some extent, on the other hand it also destroyed the capital market order. Then a series of fraud should make us think if corporate governance should have a large step. Both from the national regulation and from the audit of the external auditor, they are the external force in the influence of the enterprise, should we try to establish the enterprise internal system? After the Enron event the United States enacted the famous "Sarbanes-Oxley Act" to make mandatory in the internal control system, to a certain extent, it shows that the internal control can standardize enterprise and reduce the occurrence of corporate fraud. The Chinese government also really realized the importance of establishing the internal control, and promulgated a series of internal control regulation recently. In2006Shanghai Stock Exchange and Shenzhen Stock Exchange were released guidelines for internal control of listed companies and specified the listed company internal control construction, self evaluation report and internal control verification. In May2008, the Ministry of Finance, the Securities and Futures Commission, Insurance Regulatory Commission, the Audit Commission jointly issued the Basic Standards for Enterprise Internal Control and propose integral framework of the enterprise internal control construction. On April26,2010, the ministry of finance and other five ministries jointly issued the "enterprise internal control supporting guidelines", it also marks the basic establishment of the system of internal control in our country. The perfection of internal control of a national can regulate the system of the enterprise better and promote healthy and steady development of the enterprise, and the establishment of the internal control system has an obvious effect to standardize our country enterprise financial information and improve the quality of financial information, earnings management is one of the obvious problems, internal control will certainly play a role in reducing earnings management of enterprises.To a certain extent, earnings management is that the manager uses the judgment to change financial report in the preparation of financial reports and building economic transactions, thus misleading some stakeholders to understand the basic economic benefits to the company, or affecting the accounting data in the formation of the contract according to the report result, to a certain extent, it can mislead the enterprise investor, so we must regulate enterprise’s earnings management behavior, we always choose external auditors to regulate earnings management behavior, in the process of gradually establishing internal control, so internal control has become a kind of means to low earnings management, the internal control is from the enterprise itself, and audit is the external forces, then combining audit and internal control will be more conducive to reduce earnings management of the enterprise. This article researches internal control and external audit and the relationship between earnings management based on it, on the one hand, I want to research the relationship of the internal control and external audit in regulating the behavior of earnings management, Can they really work together? Or is there an alternative relationship? Base on the research of equity nature and the ownership concentration of different enterprises, if there is a certain internal control and external audit in the process of inhibition of earnings management. Based on this research it can help us further establish and develop the internal control system in China and create synergies with external audit better.