The Impact Of Mandatory Internal Control Auditing On The Real Earnings Management

In 2008, "the enterprise internal control basic norms" (hereinafter referred to as basic norms) required that the accountants firms should audit the effectiveness of the listed companies’ internal control. In 2010, relevant departments enact a complete set of internal control guidelines (hereinafter referred to as guidelines), which unified the authentication business internal control standards for certified public accountants to perform. The guidelines demand that the listed company shall disclose audited internal control audit report of financial reports, and meanwhile stipulated the first batches of experimental units are the companies which are domestic and overseas listed. In 2012, "Notice on the implementation of enterprise internal control standard system by classification for main board listed company" (hereinafter referred to as notice) was issued, which demanded all main board listed companies shall carry out construction of internal control. Stale dominated main board listed companies should disclose their 2012 animal reports, internal control self-assessment report released by the board of directors, and the internal control audit report of financial report released by certified public accountants. Non-state dominated company should implement the above specification in 2013, while the other main board listed company should implement in 2014.According to series of specifications, listed companies in our country are now in a stage of mandatory audit of internal control. The internal control construction can realize the purpose of reducing human manipulation and setting internal control core function reutilized. Accounting earnings management degree should be greatly reduced because of its being easily spotted by regulators. More companies try to seek other relevant way to artificially change the arrangement of real deal or other operating activities to ultimately achieve the surplus goal, which is generally referred to as real earnings management. So, after series of new policies carried out since 2012, can the real earnings management of listed companies really be suppressed?To testify the influence on company’s internal control auditing to real earnings management, considering Shanghai A-share listed companies in 2012 as research object, this paper define companies which first disclosed internal control audit reports as group A, meanwhile define companies which didn’t disclose internal control audit report continuously as group B. Using Roychowdhury (2006) research methods, the paper try to measure the impact of mandatory internal control auditing on real earnings management from three aspects:sales, production and expense, and implement vertical and horizontal analysis on the real earning management level before or after new policies on two groups. The empirical evidence showed that internal control auditing behavior has a different impact to the two different groups. After the mandatory internal control auditing policies implementation, the level of real earnings management is significantly lower than before; compared with the other group, real earnings management of the companies which disclosed internal control report in 2012 for the first time, is not significantly decreased.