Research On The Influence Of Internal Control On Earnings Management

In recent years, the phenomenon of financial fraud by means of earningsmanagement presents a ‘spread’ situation in China and foreign countries. Earningsmanagement will not only make serious economical consequences to the listedcompanies and capital market, but also distort the rationality of the allocation ofresources and disturb the development of capital market order. Issued on earningsmanagement of the listed companies have been paid more and more attention to by investors,creditors and all the other benefit relevant groups. Earnings management means themanagement has the behavior of handling accounting surplus and provide false financialinformation. One of the aims of internal control is improving financial reports and relatedinformation real integrity, so internal control can affect earnings management behavior. Fromthis viewpoint, the paper analyzed the influence that the listed company’s internal control makeson earnings management. This article will have certain theoretical meaning and realisticsignificance in improving the listed company’s internal control system, promoing theimplementation of internal control and enhancing the quality of the public companies,accounting information.The paper selects1434listed companies in2010as the research sample data, thenanalyzed the influence that internal control makes on earnings management, and divideearnings management into accounting earnings management and real activities earningsmanagement.First, this article construct the internal control index to quantify the qualityof internal controls based on the control objectives that put forward in “Enterpriseinternal control basic norms”. Then use the modified Jones model and operating cashflow model, the production cost model and discretionary expenses model calculatedaccounting choices earnings management and real activities earnings management. Last,research the relationship between internal control and earnings management by theregression analysis.Finally, this paper choose the internal control index as theexplanatory variable and handling accrued profit and real earnings managementactivities as be explained variable and then analyzed the influence that internal controlmakes on earnings management by using statistical software SPSS17.0. The result of theempirical test proves that internal control not only can reduce the choice of accountingearnings management but also can inhibit the real activities earnings management.