Research On Correlation Between Internal Control Quality And Earnings Management

At present, earnings management behaviors exist commonly in the financial market and the means are more and more subtle. As we know, earnings management behaviors have a negative effect on the development of financial market. In order to supervise and control such behaviors, more and more scholars have studied the influence factors from diverse perspectives. Internal control is the key part of corporate governance. Our research on the relationship between internal control quality and earnings management has very important theoretical and practical value.The theme of this paper is the correlation analysis between internal control quality and earnings management. We will explore the relationship between internal control quality and two different types of earnings management——real activity earnings management and accrual earnings management. By reviewing relational literatures domestic and abroad, we summarize existing research points which are the theoretical basis of the paper. The second part introduces the concept of internal control and earnings management as well as the classification, measurement methods and measuring models of earnings managements. This part also expatiates the theoretical basis of the interaction between internal control and earnings management. The third part supposes hypotheses based on the previous theoretical analysis. The empirical part of the thesis takes related data of Shanghai A-share listed companies in 2014 as samples. We use the relevant measuring model to calculate the level of real activity earnings management and accrual earnings management. According to the disclosed internal control self-assessment report, we score for each company. We take the level of internal control as explanatory variable and the level of earnings management as explained variable to set up the regression model. In addition, we select nine controlled variables from five aspects——financial position, asset size, risk situation, growth and external audit. By the empirical research we get conclusions as follows:there was no relevant relation between the quality of internal control and real activity earnings management; significant negative correlations exist between the quality of internal control and accrual earnings management. Then the paper analyzes the conclusions and some possible causes. The analysis provides a new perspective for internal control theory developing as well as earnings management monitoring in the future.