افشای داوطلبانه کنترل ضعف داخلی و کیفیت درآمد: شواهد از چین Voluntary Disclosure of Internal Control Weakness and Earnings Quality: Evidence From China

1. Introduction Establishing a high-quality internal control system has long been viewed as an important mechanism to ensure high-quality financial reporting. Prior studies show that weak internal control can increase the probability of material errors and false financial disclosures (Bell & Carcello, 2000; Kinney & McDaniel, 1989); it can also increase the probability of a firm restating its earnings (Bizarro, Boudreaux, & Garcia, 2011), as weak internal control creates more opportunities for intentional earnings management and unintentional accounting estimation errors (Ashbaugh-Skaife, Collins, Kinney, & LaFond, 2009; Doyle, Ge, & McVay, 2007). In July 2002, the U.S. Congress passed the Sarbanes–Oxley Act (SOX) in response to numerous corporate failures and accounting scandals (Altamuro & Beatty, 2010). The most important aspect of SOX is its requirement of the management and the auditor to evaluate internal control on financial reporting (Public Company Accounting Oversight Board [PCAOB], 2004; Securities and Exchange Commission [SEC], 2003). While the effectiveness of such regulation on internal control is still debated and remains controversial (Bedard, 2011; Costello & Wittenberg-Moerman, 2011; Doyle et al., 2007; Rice & Weber, 2012), some countries have followed the U.S. lead, introducing internal control reporting (ICR) with a softer approach (Cox, 2006). For example, Japan has implemented an internal reporting system with less strict requirements for all listed firms from 2008 (Nishizaki, Takano, & Takeda, 2014). Other countries, such as the UK and other European Union member states, have adopted a broad approach (Deumes & Knechel, 2008) that encompasses a wider scope of internal control systems in relation to the whole management process, rather than focusing only on financial reporting. In May 2008, the Basic Standard of Enterprise Internal Control (Basic Standard hereafter) was jointly issued by five regulatory authorities in China, including the Ministry of Finance (MOF, 2008), the China Securities and Regulatory Commission (CSRC), the National Auditing Office (NAO), the China Banking Regulatory Commission (CBRC), and the China Insurance Regulatory Commission (CIRC). Three supporting guidelines for implementing the Basic Standard were further issued in 2010. The Basic Standard and guidelines require Chinese listed firms to provide a management evaluation report on the effectiveness of their internal control as well as an auditor’s assessment of the effectiveness of clients’ internal control. In an ICR, the Chinese listed firm needs to disclose whether an internal control weakness (ICW) is minor, major, or serious; the ICR also includes a remedial plan for its ICWs. However, these regulations became mandatory only from January 1, 2012. Prior to this date, firms could choose to voluntarily comply with internal control regulations (MOF, 2010a,b,c).