Financial Distress,Internal Control And Earnings Management

Corporate financial distress has always been a concern for investors,creditors,governments and managers.There are many reasons for the company's financial results worsen,to some extent will lead to bankruptcy or be mergers and acquisitions by other companies.If a company is facing financial difficulties,its value will decline.Investors will increase risk for their inability to achieve the intended investment.Creditors may not be able to recover the loan in full,so bad debts increased.Government as intervener of the national macro-control and policies,financial distress will have a significant negative impact on taxation,resource allocation and socio-economic development.Managers will face major threats such as reduced bonuses,replacement by other managers,and loss of reputation.So,in the face of financial difficulties,managers have incentives to manipulate accruals or real earnings management activities to hide such a deterioration of the results?At the same time,with the implementation of new accounting standards in 2007,scholars generally believe that the operating space of accrual earnings management is getting smaller and smaller,and the management gradually turns from accrual earnings management to real earning management.In 2008,five ministries and commissions jointly promulgated the Basic Standard for Enterprise Internal Control.In 2010,it promulgated the Supporting Guidelines for Enterprise Internal Control,which improves the internal system and strengthens the requirement of internal control information disclosure.In this case,the strengthening of internal control will inhibit earnings management of financial distress' company?The research on these two problems at home and abroad is not sufficient.The existing literature mainly discusses the financial distress and internal control respectively from the perspective of accrual earnings management.First of all,most of the scholars take the state system as the background and start from the theory of motivation,and they think the financial distress companies will be have more accrued earnings management.Secondly,there are some differences in the study of internal control and earnings management.Some believe that internal control can restrain earnings management behavior.But there are some scholars believe that the impact of internal control on earnings management is not significant.Based on the two aspects of accruals and real earnings management,this paper studies the financial distress and the concrete relationship between the two.And further discusses the influence of internal control on financial distress and earnings management.In summary,this paper presents research questions:(1)Compare with firms of nonfinancial distress,will financial distress companies perform more accrual earnings management or real earnings management after the new accounting standards promulgating?(2)Under the new internal control requirements,whether the internal control will have an impact on earnings management behavior of financial distress companies?Will it have an impact on both the accrual and the real activity earnings management?(3)On the basis of(2),according to their severity,the internal control defects are divided into major defects,important defects and general defects.Starting from a small sample,the different types of defects have an impact on financial distress and earnings management?What is the impact?(4)On the basis of(3),to further study companies with internal control defects in the previous year,but the internal control defects rectification,have an impact on financial distress and earnings management?(5)According to the internal control construction,the internal information disclosure is divided into voluntary disclosure and mandatory disclosure.On this basis,it is studied whether the different disclosures will affect the financial distress and accruals and real earnings management?The innovation of the text is:(1)Some scholars have studied the relationship between financial distress and accrual earnings management.But there are relatively few researches who research the real earnings management of financial distress companies.This paper focuses on the relationship between real earnings management and financial distress.At the same time,we add the accrual earnings management index as a comparison,to further measure the choice of the financial distress companies between accruals and real earnings management,and to test the motivation of the selection,in order to validate the new accounting standards.(2)At present,the study of internal control is more,but only focus on one of the perspectives.In this paper,we studies from different angles,such as defects of internal control,defect type,defect rectification,internal control information disclosure.The study of internal control is more fully,also fully demonstrates the validity of the policy implementation.(3)In the definition of variables,main variables are defined and measured from multiple angles.This is conducive to the reliability of the results.