Analysis Of How Internal Transactions Are Used As A Way Of Earnings Management In Chinese Listed Firms

In order to meet the qualification of rights issue, listed firms have the incentive to conduct earnings management. Imperfections of the accounting principle provide opportunities for earnings management. This paper investigates the imperfections exist in accounting principle, which are regulations regarding related party transaction, consolidated financial statement, and segment report. Among all these three issues, only related party transaction is covered in the new Enterprise Accounting Principle. The existing regulations on consolidated financial statement and segment report cannot meet the requirement of investors. Those imperfections make it possible that some of the internal transactions are not disclosed.Three cases of listed firms are studied in this paper. All of these three firms are regarded as blue chips commonly. Based on public information, I analyzed how internal transactions are used as a way of earnings management. The result in this paper shows that all of the three firms engage in a large number of internal transactions. Those transactions are not fully consolidated in the interim report and the third quarter report. Some common features of and the analysis method to such kind of earnings management are investigated. Changing the scope of consolidation as a way of earnings management is also discussed in this paper.