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

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

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

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.