Internal Control, External Audit and Earnings Management: Evidence from Chinese Listed Companies


Dr. Shunhua Yang , Felix Kwame Nyarko , Haibin Yang , Ziqun Lu , Nothabo Michelle Moyo ,

Download Full PDF Pages: 85-96 | Views: 933 | Downloads: 273 | DOI: 10.5281/zenodo.3613393

Volume 8 - November 2019 (11)


Based on the panel data of China’s A-share listed companies from 2013 to 2017, this paper divided earnings management (EM)into accrual and real earnings management and studied how internal control (IC) and external audit, the two internal and external governance mechanisms, affect the two types of earnings management. A sample size of 12,392 value observations was drawn from 2,939 research enterprises. Earnings management model, as well as multiple linear regression models, were used to analyze the date collected. The empirical results show that, both internal control and external audit can directly restrain the enterprise’s accrual earnings management, while internal control is ineffective on real earnings management, an external audit can still be effective on real earnings management. Internal control and external audit have complementary relationships in regulating accrual earnings management, while there is neither substitution nor complementary relationship in regulating real earnings management.


Internal Control; External Audit; Accrual Earnings Management, Real Earnings Management 


i.        Yang Shunhua, Zhao Xicang, Wolfgang Mueller. 2010. Reconsideration of earnings management [J]. Financial theory and Practice (bimonthly), (3): 75-78

ii.      Cao Guohua, Luo Nianhu. 2015. Internal control, accounting firm selection and real earnings management-based on the empirical evidence of Shenzhen A-share listed companies [J]. Journal of Nanjing Institute of Audit, (3): 45-52.

iii.    Fan Jinghua, Zhang Yaman, Liu Qiliang. 2013. Internal control, auditor industry expertise, accrual and real earnings management [J]. Accounting Research, (4): 81-88.

iv.     Fang Hongxing, Jin Yuna. 2011. Can high-quality internal controls restrain earnings management? -Empirical study based on voluntary internal control forensics reports [J]. Accounting Research, (8): 53-60.

v.       Gong Qihui, Wu liansheng, Wang Yaping. 2015. Partial substitution between category two earnings management [J]. Economic Research, (6): 175-188.

vi.     Hu Quying, Lu Xiaoming. 2016. Study on the correlation between internal control and earnings management of listed companies [J]. Statistics and decision-making, (12): 166-169.

vii.   Lei Ying, Wu Jianyou, Sun Hong. 2013. Impact of internal control audit on the quality of accounting earnings: An empirical analysis based on Shanghai A-share listed companies [J]. Accounting Research, (11): 75-81.

viii. Li Ying, Zhou Shouhua, Dou Xiaochen. 2016. Has the promulgation of China's internal control norms restrained cognitive earnings management? [J]. Audit Research, (5): 82-88.

ix.     Li Yuanhui, Li Xiao. 2018. Internal control audit, internal control defects and real earnings management-evidence from China's a-share market [J]. Journal of Southeast University (philosophy and Social Sciences Edition), (20): 47-55.

x.       Wang Xiaoke, Huang Shizhong. 2017. Derivatives, corporate governance and earnings quality [J]. Accounting Research, (3): 16-21.

xi.     Zhang Guoqing. 2008. Internal control and earnings quality-based on empirical evidence from a-share company in 2007 [J]. Economic management, (3): 112-119.

xii.   Zhang Jiaxing, Fu Shaozheng. 2014. Internal control, CPA audit and earnings management [J]. Audit and economic Research, (2): 3-13.

xiii. Zhang Youtang, Xiong Yi. 2017. Internal control, nature of property rights and choice of earnings management mode-an empirical study based on the 2007-2015 A-share non-financial listed companies [J]. Audit Research, (3):105-112.

xiv. Amel KouaibaAnis Jarbouib. 2014. External audit quality and ownership structure: interaction and impact on earnings management of industrial and commercial Tunisian sectors [J]. Journal of Economics, Finance and Administrative Science,(5):102-134.

xv.   Cohen D ADey AZarowin T. 2008. Real and accrual-based earning management in the pre-and post-Sarbanes-Oxley periods [J]. Accounting Review,(83):757-787

xvi. CohenDAZarowin P. 2010. Accrual-based and real earnings management activities around seasoned equity offerings[J]. Journal of Accounting and Economics,(50):2-19.

xvii.           DeAngeloL. E. 1981. Auditor Independence “Low Balling” and Disclosure Regulation [J]. Journal of Accounting and Economics,(27):113-127.

xviii.         KothariS.,ALeoneand C2005. Wasley. Performance Matched Discretionary Accrual Measures [J]. Journal of Accounting and Economics,(39):163-197.

xix. Mohammad AlhadabIain Clacher. 2017. The impact of audit quality on real and accrual earnings management around IPOs[J]. The British Accounting Review,(12):1-20.

Cite this Article: