Research On The Correlation Between Effectiveness Of Internal Control And Real Earnings Management

A series of financial frauds such as Enron, WorldCom, broke out in the beginning of this century which sparked worldwide attention to issues related to internal control. Listed companies are forced to disclose internal control information by the section302,404articles in the Sarbanes-Oxley Act (SOX Act) enacted by the United States in2002. In recent years, the construction of enterprises’internal control system has been constantly improved in China. On July15,2006, Enterprise Internal Control Standards Committee was established by the Ministry of Finance, the SASAC, the CSRC, the State Auditing Administration, the CBRC and the CIRC. Then the Enterprise Internal Control Basic Standards was issued on May22,2008.The enterprise internal control supporting guidance was issued by the Ministry of Finance, the CSRC, the State Auditing Administration, the CBRC and the CIRC on April26,2010.According to the objectives of internal control, the effectiveness of internal control should be able to effectively inhibit the earnings management behavior. Although some domestic scholars have researched the relationship between the effectiveness of internal control and earnings management, most studies are about the relations between effectiveness of internal control and accrued earnings management. Because of the special circumstances of our country, laws and regulations related to the internal control have been improved, and the regulation is strengthened. Will enterprise managers incline to choice more real earnings managements? Would managers like to control more true earnings managements, or the opportunity for real earnings management would be reduced? This is worthy of further research. Will the different levels of corporate governance affect the relationship between internal control effectiveness and real earnings management? At present, the research on this point is very insufficient.After retrospective existing researches on domestic and foreign literature, this paper elaborated the relations between internal control and real earnings management based on the perspective of corporate governance. The paper also analyzed the basic theory of internal control and real earnings management. Then, the article divides the level of corporate governance into two groups, including high level group and low level group. The empirical tests on the relations between internal controls and real earnings management are conducted separately before and after group, include descriptive statistics, correlation analysis, multiple linear regression analysis, and robust regression analysis. The empirical results show that the scientific design and effective implementation of internal control can effectively curb the behavior of the real earnings management. And the effects of internal control on real earnings management at the high governance level are rather weak than that at the low governance level. Finally, the propositions to strengthen the effectiveness of internal control and reduce the phenomenon of listed companies’real earnings management were made from aspects of the standards of internal control’s evaluation, the information disclosure of internal control, the audit and regulation of internal control and corporate governance.This study is significant to clarify the relations between the corporate governance, internal control and real earnings management. Due to a variety of subjective and objective limitations, the paper is just the tip of the iceberg of the researches on the three relationships, which need be further expanded and explored in the future.