The Influence Of Internal Control Quality On Earnings Persistence

After the financial fraud of "Enron" and "WorldCom",the United States launched the "Sarbanes-Oxley Act (SOX)" that requires public companies to implement strict internal control system. The significant amount of financial fraud cases that have widespread impacts attracted the whole world’s attention to the construction of internal control. In May2008, the Ministry of Finance and other five ministries of our country jointly issued "Basic norms of internal control(CSOX)", and then released "a complete set of enterprise internal control guidelines " in April2010. This shows that the significance of the construction of internal control has been gradually reached a consensus in worldwide, and strengthening the quality of internal control system of enterprises have increasingly become an important means to improve the level of corporate governance of countries all around the world, especially developed countries. There were a large number of literatures about the relationship of the internal control and the quality of earnings that have been studied by a lot of bachelors. As an important aspect of earnings quality, the persistence of earnings might directly affect the accuracy of the investors’expectations for the future earnings, so it is inevitable that there is a relationship between the internal control and the persistence of the earnings.China’s Accounting Standards for Business Enterprises(2014) proposed that the enterprise must provide the index of accounting surplus, in order to meet the needs of the users of accounting information. Accounting surplus reflects the profitability of the enterprise and it can configurative the resources in the capital market, but to really play the role of accounting surplus, we need to meet next conditions: accounting surplus must be "quality"."Quality" of accounting surplus means that the accounting surplus must be continuous. Review the financial fraud cases of the past years, in1996, Jiong MinYuan has disclosed571million yuan in their annual financial report, but more than99%of it is fictional; Yin GuangXia created an "legend" of performance in1999and2000, but it was revealed all made on purpose; and then after a short while, Enron’s fraud case shocked all the world, Ancient Chinese violet inflated profits about40million yuan from2005to2008, and from2008to2011Wan Fu Biotech Company’s fiction profit was more than ninety percent of the disclosed profit. Their disclosure of accounting surplus has no value for investors to make decisions, on the contrary, it might bring huge losses to investors, and finally they all ended in failure. One of the most important reasons of it is that the accounting surplus didn’t have persistence.Under this context, this article tends to make an analysis through the related theory on the basis of normative analysis, and then use the data of SSE and SZSE from2010to2012for empirical analysis. Consider the consistency of accounting standards, this article selects2010-2012listed companies’data as sample, eliminate financial industry, ST companies and the companies that existing missing values. On the basis of the linear test model of the persistence of earnings, this article used the regression analysis method to investigate all samples of the company’s persistence of earnings. According to the higher the earnings persistence, and the higher the accrued persistence and the cash flow persistence. In this paper, the main research contents are arranged as following:The first part:introduction. Combined with China’s current reality, this section described the current situation to lead to the article themes. This section introduced the research background and the value of the article, the main research contents and methods used in the article.The second part:literature review. First this section introduced the earnings persistence and the economic consequences of internal control respectively. The author thinks that the current studies of earnings persistence were not very comprehensive. Since different scholars’research on the definition and measurement method of the earnings persistence on different application background, but less studies from the perspective of equity structure, internal control, etc. Based on this, this paper intended to research the earnings persistence, hoping to provide a basis to through improving the quality of internal control to improve the earnings persistence of public company, and consequently improve the value of the enterprise. The third part:the definition and the theoretical basis. This section mainly introduced the definition of the earnings persistence and the quality of internal control. And then introduces the theoretical basis of the next part. Finally, this section theoretically analyzed the mechanism of how the quality of internal control affects the earnings persistence,.The fourth and fifth part:This two parts are the focus of the full text, these sections introduce the research hypothesis, empirical models, the data sources and the sample selection processes of the article, then proceed the descriptive statistical analysis and regression analysis to verify the hypothesis, and analyze the empirical results, and then proceed the robustness test at last of this part.The sixth part:research conclusions and policy recommendations. According to the results of empirical research, this part summary the whole paper and then proposed some recommendations from the perspective of listed companies and regulators. And then introduces the innovation points and the deficiency of the thesis.