Study On The Influence Of Internal Control And Audit Quality On Earnings Management

In corporations,the separation of ownership and management rights makes the information asymmetries common,which provides motivation and opportunity for enterprise managers to carry out earnings management.The problem of earnings management is the focus of investors,government regulators and academic researchers all over the world.It will not only directly cause the financial information distortion of listed companies to damage the interests of small and medium investors,but are more likely to endanger the stability and development of the financial market.Internal control and external audit,as two important mechanisms of corporate governance,can ensure the authenticity and reliability of enterprise financial information through effective supervision of managers' opportunistic behavior,and the internal control standardizes the operating procedures of the daily business activities,while the external audit makes use of the professional ability of CPA to examine and verify the financial statements made by the managers.In theory,they both have inhibitory effect on earnings management.Through empirical research,many scholars have also confirmed the inhibitory effect of internal control and external audit on earnings management;however,with the increasing complexity of the business and the gradual enhancement of the external supervision,the more flexible and more concealed Real Earnings Management is more and more favored by the managers.Therefore,whether internal control and external audit can still work is worth our discussion.This paper distinguishes the Accrual Earnings Management and the Real Earnings Management,and examines the effects of internal control and external audit on these two types of earnings management,and further explores the interaction of internal control and external audit.Specifically,in this paper,we take the 2013-2015 Chinese main board manufacturing listed companies as samples,and the revised Johns model is used to calculate the Accrual Earnings Management,the calculation of Real Earnings Management is based on Roychowdhury(2006).We choose the highly recognized DIB internal control index to measure the internal control efficiency of the enterprise.In order to reflect the quality of external audit,we set up a comprehensive index which includes the scale of the accounting firm,the auditor industry expertise and the type of audit opinion.Factors such as company size,asset-liability ratio and return on asset are introduced as control variables.Based on the existing research results,we establish a series of appropriate multiple regression models,and use the statistical software Stata12.1 to analyze the samples.Empirical study results show that: first,the Accrual Earnings Management and the Real Earnings Management will be used at the same time,and managers are more inclined to use the latter;second,internal control can inhibit the two types of earnings management,while external audit only has effect on the Accrual Earnings Management;third,compared with internal control,external audit has a stronger inhibitory effect on the Accrual Earnings Management;fourth,when the level of internal control is high,the auditors find that the probability of the Accrual Earnings Management is reduced,that is,the internal control and external audit have alternative relations in the process of restraining the Accrual Earnings Management.Based on the above conclusions,this paper puts forward some reasonable suggestions for the listed companies,investors,accounting firms and regulators to improve the quality of earnings information.The listed companies should popularize the knowledge of internal control and encourage all employees to join in the process of building and implementing the internal control of the enterprises;the investors should strengthen their own professional knowledge and actively pay attention to the relevant information issued by the listed companies in order to make appropriate investment plans and correct investment decisions;the accounting firms should pay more attention to the construction of their own brands and the maintenance of their reputation,strengthen the training of professional talents,and develop their own professional expertise to improve the audit quality;regulators should strengthen the legal construction of internal control and increase the supervision of audit market.This study provides guidance for improving the quality of earnings information of listed companies,and empirical evidence for the research on internal control,audit quality,Accrued Earnings Management and Real Earnings Management.In particular,it enriches the literature on the interaction between internal control and audit quality from the perspective of earnings management.