The role of voluntary internal control reporting in earnings quality: Evidence from China |
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| Institution: | 1. International Business School Suzhou, Xi’an Jiaotong-Liverpool University, Suzhou, Jiangsu Province 215123, China;2. W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;3. Department of Accounting, Monash Business School, Monash University, Caulfield East, Victoria 3145, Australia;4. Department of Accounting, Deakin Business School, Deakin University, Burwood Highway, Burwood, Victoria 3125, Australia;1. School of Accountancy, Singapore Management University, Singapore;2. Department of Accounting, College of Business, The University of Texas at Arlington, Arlington, TX, USA;1. Department of Accounting, College of Business, University of Texas at Arlington, TX, USA;2. Department of Accounting and Finance, School of Business Administration, Oakland University, MI, USA;1. Department of Finance, Tunghai University, Taiwan;2. Department of Quantitative Finance, National Tsing Hua University, Center for Research in Econometric Theory and Applications, National Taiwan University, Taiwan;1. School of Accountancy, Massey University, New Zealand;2. Department of Accounting, Auckland University of Technology, New Zealand;3. School of Accounting, Curtin University, Australia;1. UQ Business School, The University of Queensland, Australia;2. Beedie School of Business, Simon Fraser University, Canada;1. School of Business and Economics, Loughborough University, UK;2. Faculty of Commerce, Cairo University, Egypt;3. Management School, Sheffield University, UK;4. McAfee School of Business, Union University, TN, USA |
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| Abstract: | Using discretionary accruals to proxy for earnings quality, this study investigates whether and how the first voluntary internal control reporting in 2007 is associated with earnings quality in China. We find that earnings quality is higher in 2007, yet not in 2006, for public companies issuing a first-time voluntary unqualified internal control report, compared with listed firms not issuing an internal control report. Our findings are consistent with a signalling of performance explanation and inconsistent with a signalling of effectiveness explanation. We also find that earnings quality is lower for public companies issuing an internal control report mentioning a weakness, compared with public companies not issuing an internal control report. Overall, our study suggests that public companies conduct diligent self-assessments when issuing a first-time voluntary unqualified internal control report. Consequently, there is an improvement in earnings quality. |
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| Keywords: | Internal control reporting Voluntary Unqualified China First-time reporting |
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