The Research On The Relationships Between Internal Control Disclosure And Earnings Management

Earnings management refers to the activity that the companies change the accounting policy of the company to maximize enterprise value or private interests, and change the disclosed financial reporting data to mislead the stakeholders’ decision making. Internal control is to ensure compliance with national laws and regulations, improving the operating efficiency of the company, safeguard company assets, and processes to achieve strategic targets of the company. Information disclosure of internal control can urge authorities to improve internal control awareness, strengthening internal control management, and can provide more useful internal control information which financial report don’t contained to all sorts of report users. So, the internal control system and information disclosure can effectively inhibit earnings management.In the first part of the article, the information disclosure of internal control and earnings management are defined. And then we described the development and current situation of internal control system. Also we elaborated the agency theory, information asymmetry theory and Signaling theory which are the common theoretical basis of information disclosure of internal control and earnings management. Further we discussed the relationship between earnings management and information disclosure of internal control and made corresponding assumptions.The empirical part of the article studied the company’s disclosure of internal control report. We used cash flow Jones model to measure the degree of earnings management, and used descriptive statistics, multiple regression analysis to analyze the relationship between earnings management and information disclosure of internal control to validate assumption. The results suggest that sufficient internal control information disclosure can be effective in reducing the earnings management behavior. The degrees of earnings management in voluntary disclosure of internal control reports companies are lower than other companies of the non-disclosure of internal control report. In addition, the company’s assets, capital structure ratio and other factors will also affect the degree of earnings management. At the end of the article, we made some recommendations combined with the realities in China to related departments for decision-making.