Ultimate S Characteristics, Effectiveness Of Internal Control And Real Earnings Management

A series of economic crimes in the early 21st century, such as the famous Enron, gives birth to 2002 of the Sarbanes-Oxley Act, so that the internal control obtains widespread concern around the world. Countries and regions follow the United States to enact relevant laws and regulations. China is also paying attention to construction of internal control. There are lots of academia literatures on internal control, from influencing factors to the economic consequences of the failure of internal control, especially on the effectiveness of internal control and real earnings management. In recent years, the academic circles pay attention to the point from the accrual earnings management to the real earnings management. Management is generally carried out by arranging the transaction time, content and nature of the specific activities. At present, most of China’s major research summarized in two points, on one hand, effectiveness of internal control can repress real earnings management activities, on the other hand, there is no correlation between the two. This article will continue to study the relationship between the effectiveness of internal control and real earnings management, and add the variable of ultimate controller features including control ratio, the degree of separation of two rights and the ultimate nature of property rights based on it, which broads the perspective of the relationship between internal control and real earnings management.Based on the analysis of domestic and foreign literature on internal control, real earnings management and ultimate controllers characteristics, this paper uses dibo internal control index as a proxy for the effectiveness of internal controls, and use the method of Roychowdhury (2006) to measure the real earnings management, and add the variable of ultimate controller features, study the effects of the ultimate controller s characteristics and the internal control effectiveness on the real earnings management. The results show that there is a negative correlation between the internal control effectiveness and real earnings management; and compared to the ultimate ownership of stated-owned enterprises, the relationship of non-state enterprises is more significant. When the ultimate controller is not absolute holding, with the control increases, the relationship between the internal control efficiency and the real earnings management is weak. After that, the relationship between the control and the real earnings management is more significant. With the degree the separation of the right increases, the relationship between the two is weak. According to empirical research findings, this paper puts forward suggestions on how to strengthen the real earnings management. At last the limitations and future research prospects were further elaborated in this paper.Through studying the relationship between internal control effectiveness and real earnings management, the paper proposes new idea about how to suppress the real earnings management of listed companies, which will help strengthen the importance of internal control construction. In addition, the impact of ultimate controller’s characteristics on the relationship above will provide empirical evidence to the different types of enterprises. This article adds a new perspective in some research field and enriches the study of the relationship between the two.