Research On The Inhibition Of Effectiveness Of Internal Control On Excessive Earnings Management

Effectiveness of internal control has been aroused unprecedented attention due to frequent occurrence of financial scandals. Both theorists and practitioners desperately look forward to high-quality internal control’s blocking effect of excessive earnings management. Managers have responsibility for formulation and implementation of internal control. They, however, are also the perpetrators of earnings management. Therefore, it has profound significance to confirm whether internal control has the containment effect of earnings management or not.Through collecting and analyzing the existing literature’s related theory, theoretical framework of this paper is established. On the basis of theoretical analysis, the argument of this paper is examined through empirical methods. The study’s samples are non-financial A-share companies listed on the Main Board from 2011 to 2013. The remaining number of samples is 5335 excluding incomplete dada sample. This paper assesses effectiveness of internal control by using DIB’s index and auditors’ audit opinion. Besides, the modified Jones model and real activities manipulation of Roychowdhury model are used to respectively measure the degree of accruals and real activities manipulation.The result suggests that an effective internal control can suppress accrual earnings management but it plays a relatively smaller role in the real activities manipulation. The auditors are more capable to detect the flaws of internal control than DIB’s index. In addition, this paper provides empirical evidence on following conclusions:large companies usually have less accrual earnings management; company with high equity-debt ratio tends to engage in accrual earnings management; high managers’remuneration, rate of return on total assets and total assets turnover have a robust correlation of earnings management; managers with high percentage of the shares are associated with lower real activities manipulation; ownership concentration and the proportion of independent directors have no clear relationship with earnings management; real activities manipulation is not only subject to the internal control but also influenced by the macroeconomic environment.