China's Listed Companies Internal Control Disclosure And Earnings Quality

In the modern market, a good internal control can timely detect financial fraud and prevent earnings management, thereby enhancing the quality of financial reporting, reducing investment risks. Investors hope that companies have good internal controls in order to safeguard their legitimate rights and interests. Thus the disclosure of company's internal control becomes more important for investors to make a right decision. Supervision department demand the main board listed companies in Shenzhen to disclose their internal control information in their annual financial report from the beginning of 2007. But there is less research on this policy's effect, so this paper's main research purpose is to explore whether the implementation of this mandatory policy can improve the listed companies earnings quality.Through summarizing the related research on internal controls, disclosure of internal control information and earnings quality at home and abroad, the paper presents 5 hypothesis and selects the samples from the A shares main board listed companies in Shenzhen between 2004 and 2007, uses the discretionary accruals as a measure of earnings quality standard, makes regression analysis,parameter testing and related analysis by SPSS11.5 to discuss on the relations between the disclosure of internal control information and earnings quality.The results show that the listed companies who are demanded to disclose the information of internal control have a higher level of discretionary accruals in the year before the implementation of the policy; the significant variation is resulted from the reversal of prior accruals that are not proper by the listed companies'management. But the results do not prove this policy will improve the earnings quality in 2007, it maybe relate to the adjustment by management in 2006 and the implementation of new accounting standards in 2007.