The Type Of Internal Control Attestation Services,state Ownership And Earnings Management

Internal control third-party attestation services includes internal control audit and internal control review. Even though there is a worldwide consensus as to the necessity of CPA internal control attestation services for public companies, there is divergence of views as to which type of internal control attestation services for public companies.Since the promulgation of the Sarbanes-Oxley Act(SOX), the United States and other western countries have already required internal control audit by auditors for all public companies. But China has required the audit and the review by auditors of the internal control respectively. In 2013, the number of internal control audit for public companies is 1138, and the number of internal control review for public companies is 636. But in 2014, the number of internal control audit for public companies is 1453, and the number of internal control review for public companies is 693. The implementations of internal control audit and internal control review both have developed rapidly. However in the rapidly development of the implementation, whether internal control audit and internal control review are same as our regulators expected, bringing different economic consequences for public companies? The existing research does not give an answer. In addition, considering the special case of the capital market in China, there are significant differences both in agency costs financing constraints between state-owned enterprises(SOE) and non-state-owned enterprises(NSOE). Can internal control audit and internal control review bring different economic consequences for SOE and NSOE? The existing research is also not relate to these problems.Based on the group of public companies with internal control third-party attestation services by auditor, this paper examines the different influence between internal control audit and internal control review on earnings management. We find that internal control audit has a larger influence than internal control review on inhibition of both accruals earnings management and real earnings management. Considering the state ownership, the difference in the influence on inhibition of accruals earnings management is larger in SOE and less in NOSE. But the difference in the influence on inhibition of real earnings management is larger in NSOE and less in SOE. So we firstly suggest that our regulator should push forward the internal control audit in public companies, to gradually replace the internal control review. It can strengthen auditor’s external supervision function of internal control system, also inhibit management earnings management behavior. Secondly, our regulator should improve the laws and regulations of internal control third-party attestation services according to the state ownership. Only in this way can our regulators supervise the internal control system of SOE and NSOE respectively.