A Study On The Impact Of Internal Control Audit On The Quality Of Earnings

This paper studies the impact of internal control audit on the earnings quality. The reason to choose this topic is based on the backgrounds of that the "Sarbanes-Oxley Act" issued by the United States in2002, opened the prelude of enforcing internal control audit, promoting the development of the internal control audit business all over the world. But in China, the internal control audit Started relatively late, and a series of financial fraud cases reveal that the governance capability of our corporations still keep at low level and the construction of internal control is not consummate. In a result, China published "C-SOX" in May2008, and in April2010, promulgated the "Supporting guidelines for enterprise internal control ", and stipulates that in2012Chin begins to enforce the internal control audit; In August2012, China issued the notification about the implementation of internal control system in main board listed corporations by stage and in batches. By far, our country’s internal control system has been completed, and2012can be consider as the year of semi compulsory implementation.In this context, researching the influence of the internal control audit on accounting information quality from the perspective of listed corporations and drawing conclusions through empirical study, will provide a basis for the formulation of policies of nation and listed corporations.Through the analysis of theories including principal-agent theory, the concept of entrusted economic responsibility and contract theory, this paper argues that the internal control audit can improve the quality of earnings. Before the empirical analysis, this paper starts with summarization of the literature studying the relationship between internal control audit and the quality of earnings, and then, elaborates the development process and present situation of internal control audit. The contents after that includes analyzing the relevant theories, putting forward hypothesis, screenings data, conducting the empirical test and analyzing the empirical results. Finally, relevant comments and suggestions are put forward based on the empirical results. Besides, the deficiencies and the follow-up prospects are pointed out.The research concludes that the corporations conducting the internal control audit can reduce the degree of earnings management, and consequently improve the quality of earnings; If the certified public accountant provide a nonstandard audit opinion for the corporation’s internal control, the management hierarchy will improve the internal control construction and reduce the degree of earnings management, in order to prevent the issue happening again on next year. As a result, the quality of earnings will be increase on the following year. Auditors belonging to the ten great accounting firms, can provide much stricter internal control audit, so that the quality of earnings disclosed by listed corporations can be much higher.The main contributions of this article are as follows:at first, basing on the principal-agent theory, entrusted economic responsibility theory, contract theory, it empirically proves that the internal control auditing can improve the quality of accounting information from the perspective of internal control audit. Besides, it refines the internal control audit and then provides empirical evidence for the further policy formulation and implementation of the internal control audit through the index of high-quality internal control audit-nonstandard audit opinion and Big10ten public accountings.The main deficiencies of this paper is that because the internal control audit was not enforced until2002. Few corporations are provided with nonstandard audit opinion, thus, the size of sample is a little small, so the paired test used in the empirical study. And the number of control variables in the regression model chosen more limited in future studies can be considered hierarchical design of the control variables, making the conclusion of the study is more convincing.