The Effect Of The Implementation Of Internal Control Audit On Earning Quality

The quality of financial reporting information is affected by the quality of earning. Thedropping of earning quality can mislead investors and other users of the information to makewrong decisions. In order to increase the decision usefulness of financial reportinginformation and improve the quality of earning, the construction of enterprise internal controlsystem is being paid more and more attention. China’s ministry of finance, the CSRC, auditcommission, banking and insurance regulatory commission in2010issued “a complete set ofenterprise internal control guidelines” which further standardize enterprise internal controlsystem. They also established timetable that domestic and overseas listed companies take thelead in implementing internal control audit on January1,2011. As an important systemarrangement, internal control audit has been paid close attention by regulators and investors,and it can encourage managers pay more attention to the construction of internal control toperfect the internal control. The better internal control system can alleviate the principal-agenteffectively.After the implementation of SOX bill in America, the relevance study about internalcontrol audit and earning quality has just began and it arose from the strict policy. Since it hasbeen two years after the implementation in China, the relevance study between them will bevery useful. So far no one has conducted in-depth research about this problem under thebackground of the current system, and this is also the innovation of this article. This articletakes the implementation of internal control audit policy as the background, takes China’s Ashares listed companies who performing internal control in2011as the sample group, selectssome listed companies who meeting certain conditions as the control group, and usesempirical method to research the effect of the implementation of internal control audit onearning quality. Earning quality is measured by its two main characteristics: earningreliability and earning relevance.We use accrual quality to metric earning reliability and use the revised Jones model. Theempirical results show that compared with the previous year, the absolute maneuveringaccrual of sample group reduced greatly after the implementation of internal control audit,and decreased more significantly than control group. We use earnings response coefficient tomeasurement earning relevance, and use the event study method to inspect the share pricereaction prior and after the disclosure date of internal control audit report. The empirical results show that the sample group has higher standardized cumulative abnormal residualsthan control group during the same date; that is to say, the respond to unexpected earning inthe market is stronger for the sample group. Robustness test further confirmed the twoassumptions, so the implementation of the internal control audit helps to improve earningreliability and earning relevance and it supports the conclusion that the internal control audithas a positive effect on earnings quality.This article provides empirical evidence for that: the internal control audit can improveearnings quality of listed companies; the study results answers the applicability of internalcontrol auditing system in our country. So it has important practical significance. Accordingto our research, this paper puts forward two main corresponding policy recommendations,including promoting our enterprise to further establish a sound system of internal control,strengthening the regulation on the implementation of internal control audit.