The Impact Of Internal Control Audit On Earnings Quality Of Small And Medium-sized Listed Companies In China

As a kind of vital capital market mechanism design,internal control audit(ICA)play an important role in improving corporate governance and ensuring companies' earnings quality,which has been verified in theory and practice.However,in the process of developing ICA in small and medium-sized enterprises,the contradiction between audit fees saving and earnings quality improvement is highlighted.Unexpectedly increasing of audit fees cause resistance of small and medium-sized enterprises,and subsequently the regulator grants them exemptions from ICA.Inversely,China explore workarounds to develop ICA for middle and small-sized enterprises,which is based on balancing audit fees and ICA.That is: first,companies listed on small and medium-sized enterprise board(SME board)are empowered to choose the type of ICA.SME board listed companies can choose to implement internal control audit or assurance;Second,respect the frequency that enterprise selected to implement internal control audit.SME board listed companies can execute ICA once every two years.Whether this policy arrangement can play a realistic role in reducing audit fees,and what the effect of ICA on improving earnings quality is a question worth studying.The paper adopts data of listed companies on SME board from 2008 to 2016.Empirical research is used to test the influence of China's innovative ICA policy on the earnings quality.In addition,the paper also selects two representative companies for case analysis,to support and complement the results of empirical research from the case level.The results showed that:(1)China's two flexible provisions of developing ICA in SME board can significantly reduce audit fees of SME board listed companies.(2)the implementation of ICA can significantly improve earnings quality of listed companies on SME board.(3)compared with implement ICA in low frequency,implement ICA in high frequency can ensure and improve earnings quality more effectively.Besides,the paper doesn't found a significant decline in earnings quality in the absence year of ICA for companies implement ICA in low frequency.(4)compared with the internal control assurance,ICA is more effective in guaranteeing earnings quality.In conclusion,the ICA policy of SME board in China is a balanced plan after synthetically consider audit fees and earnings quality.It shows China's successful experience of exploring new road in the development of ICA system in capital market.The paper analyzes the influence of the special ICA policy on the audit fees and earnings quality,can enrich the existing literatures on the relationship between ICA and audit fees and between ICA and earnings quality.