A Study Of The Relation Between Internal Control Information Disclosure And Accrual Quality Of Listed Companies

This paper is a research of the relation between internal control information disclosure and earnings quality of listed A-share companies in SSE from different regulatory background. High quality of internal control information disclosure of listed companies can alleviate information asymmetry between investors and operators, reduce the agent cost, cover the incomplete contract and coordinate the interests of different property right holders. Also, it is indispensible for the set up of effective security market. Prior studies of the relation between internal control information disclosure and earnings quality were mainly based on a stable regulatory background, this paper attempts to explore the relation between internal control information disclosure and earnings quality from a changing regulatory background.Firstly, I selected panel data of849samples of1674observations from the Shanghai A-share listed companies in2010and2011. Under the background of voluntary disclosure of internal control, I use voluntary disclosure of internal control information as a proxy variable of high quality of internal control, and test the relation between internal control information disclosure and earnings quality. Then I selected570state-controlled listed companies from the previous849companies as samples, collected their data in2011and2012, and tested whether companies received their first internal control audit as a response for the mandatory implementation of internal control information disclosure system for the first year of2012make significant changes of their internal control and earnings quality.The study found that in the phase of voluntary disclosure of internal control information, the earnings quality of companies proactively disclosed their internal control information was significantly higher than companies that not disclosed their internal control information, shows that high quality of internal control can significantly restrain accrued earnings management activities thus improve the earnings quality. However, the implementation of mandatory internal control information disclosure system for the first year did not improve the earnings quality of listed companies, means that result of this policy was not satisfactory. Therefore I suggested that we introduce an evaluation system operated by the stock exchanges to rate listed companies’internal control quality according to conditions showing to what extent the internal control goals are achieved. Those conditions can be easily observed by outsiders. Meanwhile, a sound system to identify, respond and disclose internal control deficiencies to be built, the internal control deficiencies related criteria to be more refined, and hierarchies and prescriptions for different degrees of defects to be defined.