A Research Into The Influence Of Internal Control Quality On Earning Persistence

The resources allocation efficiency in the capital market can be reflected byAccounting Earnings (AE), whose quality has drawn great attention from the existingand potential stakeholders such as enterprise owners, managers and lenders etc. Theirimmediate interests are closely related to financial statements. Earnings Persistence,(EP)as a critical indicator in measuring the Earnings quality, has been a focus in boththeoretical and practical cycles. The previous relevant theoretical studies used to bemainly on such influencing factors as equity structure, accounting quality information,capital structure, capital intensity, stock dividend payments and audit opinions while theessential influencing factor---Internal Control Quality (ICQ) has been paid less attentionto and done less research on. Few present relevant studies are based primarily on theaudit opinions of financial statements as a substitute variable for ICQ. However, thereexists a big difference between the audit opinions of financial statements and ICQ.Under such circumstances, the corresponding conclusions to be drawn is not completelyreliable and beyond question.The five Ministries including Ministry of Finance issued FundamentalRequirements for Enterprise Internal Control in2008and18-item CorrespondingGuidance for Enterprise Internal Control in2010, requiring all public companies tomake public their internal control reports audited by registered accountants since2011.As a result, some improvements have been made more remarkably than ever in both thequantity and quality of the disclosure of the internal control information. In suchresearch context, this thesis is intended to have a data collection and offer a detailedanalysis of all the listed companies from2011to2013in the Stock markets of Shanghaiand Shenzhen as samples from three perspectives: the ICQ influence on EP, its concreteinfluences on the two EP’s components---Accrual Basis Earnings (ABE) and Cash BasisEarnings (CBE) and finally the ICQ’s improvement based on the changes in EP.On the basis of the empirical study, the following conclusions can be reached:1.ICQ shows significant positive correlation with EP: the higher the ICQ, the longer theEP;2. ICQ has influences on both Accrual Basis Earnings and Cash Basis Earnings,which does stronger on ABE than on CBE;3. With ICQ improving, EP can be improvedtoo.