The Effect Of Mandatory Internal Control On Real Earnings Management

Earnings management is a process of judgment and accounting choice when the enterprise management authorities preparing financial report and fabricating transactions in order to make other accounting information misunderstand its performance or the result of account date contract. Earnings management is divided into the accounting choice of earnings management and real earnings management activities. Accounting based earnings management is an adjustment by management within the accounting standard tolerance through the choice of accounting policies and accounting estimates. Real earnings management is the result of friction transactions or takes the secondary beneficial activities, mainly through manipulate sale, production, and cost etc. In recent years, with the trend of accounting standards increasingly perfecting, authorities supervision strengthening and the relevant party precautions rising, the room for accounting choose is shrinking. A series of empirical evidence have testified that, accounting choose earning management is not the primary way of earning management, instead, the real activities earning management has gained the favor by management for its relative concealment, diversity and flexibility.In recent years, the capital market is making effects to propel the establishment of internal control in listed corporations, to highlight the supervision on listed corporation. Shanghai Securities Exchange and Shenzhen Securities Exchange respectively released internal control guidelines in2006, initiate the standardization of Internal control. While the Treasury Department co-released Internal Control Basic Regulations with other four departments in2008, and released complete internal control system afterward in2010, which marked the establishment of internal control regulation system propelled by supervision department. Internal control regulation system has experienced volunteer stage, and mandatory stage, and will lead to comprehensive stage. However, the effect of mandatory internal control stage is still under testifying. Therefore, this paper analyzes the influence of real activities earning management in mandatory stage, and begins empirical study by selecting date from listed corporations.The theory part first teases the process of internal control applying, then elaborates theoretical basis of internal control and earning management. The part ends with analyzing the relationship between the mandatory internal control and real earning management activities, raises the hypothesis. The empirical parts first introduces real activities model, based on which the paper continues to analyzes the effect of mandatory internal control on real activities earning management utilizing data from A share listed corporation. The research shows that real activities earning management become more significant after mandatory internal control. The further research shows that real activities earning management in state-owned corporation get more significant than non-state-owned corporation. The paper concludes relevant policy suggestions towards the features of internal control stage, which is to propel the check and monitor toward the effect of internal control carrying-out, attention to real activities earning management and steadily impelling the establishment of internal control regulation system.