Research On The Relationship Between Earnings Management And Auditor Changes Moderated By Internal Control Quality

The Chinese Institute of CPAs has been paying close attention to listed companies that were frequently changing auditors, prompted audit risk of these listed companies’ annual report since 2002. Most of them arbitrarily disclose the reasons, so it is difficult for the information users to know the real reason from disclosures. Because the disclosed reasons are usually "according to company development needs," "according to the actual situation"; some companies didn’t disclose the nature reason; even no mention matters reason for the change. For example, 164 companies changed auditor among 2667 listed companies, accounting for 6.15 percent, which revealed the reasons such as commission expires, long service life. Most existed research focused on accrual-based earnings management, but this article introduces real activity earnings management, based on principal-agent theory, investigate relationship between earnings management and auditor changes.The article selected main factors influencing auditor changes, and built Panel Logit models, using descriptive statistics and regression analysis, taking data from 2010 to 2014 of A-share listed companies to test effect on auditor change that accrual-based earnings management and real activity earnings management have, effect on the former relationships that internal control quality have, based on related literature review and theoretical analysis. The results showed that:(1) the relationship between accrual-based earnings management and auditor change is positive, the same as real activity earnings management;(2) compared to accrual-based earnings management, real activity earnings management makes a less difference on auditor change;(3) internal control quality doesn’t affect the relationship between accrual-based earnings management and auditor change;(4) the poor internal control quality strengthens the relationship between real activity earnings management and auditor changes.According to results from the empirical and theoretical analysis, no matter what kind of earnings manipulation of listed companies adopt, it leads to auditor change. When both methods exist, accrual-based earnings management has stronger influence than real activity earnings management; the listed company’s internal control quality has different effect on relationship between two different earnings management and auditor change. Finally, the article offers proposal aiming to enhance the internal control quality of listed companies and improve the information disclosure mechanism.