TITLE:
Internal Control, Life Cycle and Earnings Quality —An Empirical Analysis from Chinese Market
AUTHORS:
Tingting Chen
KEYWORDS:
Internal Control, Life Cycle, Earnings Quality
JOURNAL NAME:
Open Journal of Business and Management,
Vol.4 No.2,
April
26,
2016
ABSTRACT: Whether internal controls can effectively constrain earnings management, which is a hot topic in
recent years. I investigate the impact of internal control on earnings quality based on a life cycle
perspective using data of listed companies of China’s market from 2010-2013. The empirical findings
indicate that high quality internal control can suppress accrual earnings management and
real earnings management (except for discretionary expenses manipulating earnings management)
effectively, whilst in different life cycle stages (LCSs), the relation between internal control
quality and accounting earnings quality (accrual quality and real earnings quality) is different. For
the accrual quality aspect, in mature LCS, internal control quality and accrual quality is positively
correlated. In growth or decline LCS, the relation between internal quality and accrual quality is
not significant. For the real earnings quality aspect, in decline LCS, high quality internal control
can improve real earnings quality; in growth LCS or mature LCS, the relation is just the opposite.