The Impact Of Internal Control Weakness On The Listed Companies’ Earning Management

In order to improve the reliability of corporate financial information, and safeguard the rights and interests of stakeholders, in addition to constantly improving the accounting standards system in our country, the relevant departments have stepped up the pace of improving the internal control system in listed companies since 2006, and therefore the majority of scholars have begun to study the role of internal control in the business management. Previous studies are mostly about the internal control weaknesses, the relationship between earnings management and internal control, the difference of earnings management between the firms with weak internal control and the firms with strong internal control. The year of 2012 is the start of listed companies in our country being enforced executing internal control, so the paper chose the year between 2012 to 2014 as the interval of samples, and chose no-financial listed companies of A shares in Shanghai and Shenzhen business as the research object which disclosed internal control weaknesses and corrective measures in the internal control self-assessment report.Previous research on internal control and earnings management, most scholars broadly study the relationship between the internal control weaknesses and earnings management. Referring to previous research findings, this paper study on the relationship between internal controls weaknesses and earnings management and is based on using the principal-agent theory as a logical starting and the asymmetric information theory and the signaling theory as theories. And then with the study of internal control weaknesses and according to internal control weaknesses having a direct or an indirect impact on the financial report, we try to divide internal control weaknesses into a level of accounting and a level of company, and both will be defined. Based on this, we re-classify internal control weaknesses which is disclosed in the internal control self-evaluation report that provided by listed companies into the level of accounting and the level of company.(Wang Huifang, 2011). In additions, earnings management is divided into accruals earnings management and real activities earnings management, and is measured separately. Finally, by constructing multiple regression models, we test the influence of the two internal control weaknesses which is disclosed in the internal control self-evaluation report on the two different types of earnings management with empirical analysis.Methods used in this paper are literature analysis, qualitative analysis and empirical analysis. By studying a large number of relevant literatures of domestic and foreign, summarizing and arranging, we initially get the definition of the accounting-level and the company-level internal control weaknesses and define the definition of the accruals earnings management and the real activities earnings management, then understand scientifically the influence of the two types of internal control weaknesses on the two methods of earnings management. Based on this, we propose the hypothesis about the extent of influence of the different types of internal control weaknesses which is disclosed in the internal control self-evaluation report on the two of earnings management. And we set up empirical models to test the hypothesis.We use traditional econometric methods, mainly using Stata software to test our hypothesis. The results show that the enterprises which disclosed internal control weaknesses in the internal control self-evaluation report, the level of accruals earnings management of enterprises which exist accounting-level internal control weaknesses is lower than that of enterprises which exist company-level internal control weaknesses; the level of real activities earnings management of enterprises which exist company-level internal control weaknesses is higher than that of enterprises which exist accounting-level internal control weaknesses. There must be some limitations and shortcomings in our study, and we just hope to bring some inspiration for other scholars.