Research On The Managerial Ability,Internal Control And Earnings Quality

Earnings are the manifestation of business results in a certain period of time.They are also an important index to evaluate the performance of enterprises or managers.They are one of the most direct and important bases used by information users when making decisions.Earnings information is an important part of information disclosure of listed companies.The quality of earnings is not only related to the correctness of various decisions made by information users based on the financial performance of enterprises,but also to the validity of compensation contracts of enterprise management and the normal operation of capital market.Therefore,how to improve the quality of earnings information of listed companies has become one of the hot issues in academia and practice.The separation of ownership and management in modern enterprises determines the daily production and operation activities,investment decisions,financing decisions and company development strategies of enterprises as the ultimate decision-maker.Different managers have different interpretations of the internal and external environment and related information,so they make different decisions.In 2006,the issuance of China's new enterprise accounting standards system has brought more room for listed companies to choose accounting policies.Management will generate financial information of different quality because of their ability differences and other factors.However,most of the previous studies imply the hypothesis that all managers are homogeneous,so the relevant research is very limited,especially on whether the differences in managerial ability will affect earnings quality.It is generally believed that competent managers have more reliable and forward-looking estimation and judgment,more accurate interpretation of information and future prediction,better control of company management and decision-making,more accurate use of corresponding accounting policies and estimates to deal with specific matters,so they are more inclined to reveal higher-quality earnings information.However,due to the asymmetry of information and the incompleteness of contracts,managers may also conduct earnings management actions for certain interests,thus affecting the earnings quality of companies.So far,there are few studies in this field in China,and the conclusions of the few remaining documents are inconsistent.Since the 21 st century,with the exposure of various cases of financial fraud,the construction and implementation of enterprise internal control has been paid more and more attention.A series of internal control norms were introduced.Internal control runs through the whole business process of an enterprise,aiming at preventing the occurrence of various misconduct of the enterprise.So since the implementation of internal control,has the establishment of internal control achieved the expected goal? Is there any restraint to earnings management? Does it improve the quality of earnings information? Will high-quality internal control also restrict management? These problems need to be further verified.This paper will study the relationship between managerial ability,internal control quality and earnings quality.This study will help people to understand and recognize the earnings quality of senior human capital of Listed Companies in China,help regulators to improve the corresponding internal control,help enterprises establish and implement more effective internal control,and improve the quality of earnings information.It has a certain theoretical basis and practical value.On the basis of reviewing the relevant literature at home and abroad and summarizing the relevant research results,starting from the connotation and measurement of managerial ability and earnings quality,this paper probes into the influence of managerial ability differences,internal control quality on earnings quality of enterprises,and the influence of internal control quality on the relationship between managerial ability and earnings quality.This paper makes a thorough analysis of the ownership characteristics of Listed Companies in China,and puts forward corresponding hypotheses.Finally,according to the results of the study,the conclusions of the paper are summarized,and the corresponding policy recommendations are put forward,pointing out the direction of further research in the future.Through the research,this paper mainly draws the following conclusions:(1)Managerial ability,internal control and earnings management: First,the stronger the managerial ability,the higher the level of accrued earnings management and the lower the level of real earnings management.It shows that the competent managers of Listed Companies in China may use their own thorough understanding of the internal and external situation of the company and their own ability to conduct earnings manipulation through accounting policy choices and changes,but they will not choose the real earnings management behavior that undermines the business objectives of enterprises.Secondly,the quality of internal control is negatively correlated with both accrued earnings management and real earnings management,which shows that the establishment and implementation of internal control not only reduces the space of accrued earnings management,increases the cost of accrued earnings management,but also inhibits the real earnings management behavior of management from the whole production and operation links.Finally,it is found that,compared with low-quality internal control,high-quality internal control helps to enhance managerial ability to inhibit the behavior of accrued earnings management and real earnings management.It shows that the improvement of the quality of internal control will restrict the management of enterprises,reduce the opportunistic tendency of management,restrain the management from adjusting profits through earnings management behavior,and then improve the quality of earnings.(2)Managerial ability,internal control and earnings persistence: Firstly,there is a significant positive correlation between managerial ability and earnings persistence,indicating that the stronger the managerial ability of listed companies,the better the earnings persistence.Further analysis shows that managerial ability can also promote the sustainability of cash flow profits,but it has no significant impact on the sustainability of accrued profits.Secondly,the higher the quality of internal control of listed companies,the better the earnings persistence.Further tests show that high quality internal control makes the cash flow profit of the company more sustainable.Companies with high quality of internal control can restrain earnings management to improve the sustainability of accrued earnings.Finally,it is found that the establishment and implementation of high-quality internal control will help to enhance the positive correlation between managerial ability and earnings persistence.(3)Managerial ability,internal control and earnings timeliness: There is a significant positive correlation between managerial ability and earnings timeliness,indicating that the stronger the managerial ability of listed companies,the better the timeliness of earnings information.The higher the quality of internal control of listed companies,the better the timeliness of earnings.Finally,the influence of internal control quality on the relationship between managerial ability and earnings timeliness is investigated.The results show that high-quality internal control helps to enhance the positive correlation between managerial ability and earnings timeliness.The innovation of this paper is mainly embodied in the following three aspects:(1)Compared with the existing research literature,in terms of the measurement of managerial ability,it breaks through the standard that the existing literature takes the background characteristics of management as the substitute variable.From the perspective of management efficiency,it measures the size of managerial ability according to the ratio of output to input,and studies the impact of managerial ability on earnings quality.Documents similar to this study are mostly based on the background characteristics of managers or boards of directors.However,more and more literatures show that different managerial ability will lead to different interpretations of the macro and micro environments faced by enterprises.There will be great differences in the production,operation and strategic decision-making of enterprises,which will affect the final results of accounting information,which will undoubtedly have an impact on earnings quality.In addition,when defining earnings quality,based on the useful measurement of decision-making and the process of earnings generation,this paper comprehensively measures earnings from the perspectives of authenticity,persistence and timeliness.(2)Compared with the existing research literature,this paper expands the research scope of influencing factors of earnings quality,and enriches the research on the impact of managerial ability on earnings quality.Although there are abundant literatures on the influencing factors of earnings quality,they mainly focus on the internal governance,such as the characteristics of the enterprise itself,the ownership structure of the company,the characteristics of the board of directors,managers' salaries,and external governance,such as CPA auditing,policies and regulations.Few papers have studied the relationship between managerial ability and earnings quality,and only considered the impact of managerial ability on one aspect of earnings quality.This paper deeply studies how managerial ability affects earnings quality,and incorporates the quality of internal control into the scope of research,expands the research in the field of influencing factors of earnings quality,and enriches the literature in this field.(3)The theory of internal control objectives is used to explain the influence of managerial competence on earnings management behavior.The empirical results show that managerial ability is positively correlated with accrued earnings management(contrary to assumptions),but negatively correlated with real earnings management.For this result,this paper explains it from two aspects: internal control operation goal and financial report reliability goal.