The role of voluntary internal control reporting in earnings quality: evidence from China

Xudong Ji, Steven E. Kaplan, Wei Lu, Wen Qu

Research output: Contribution to journalArticleResearchpeer-review

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.

Original languageEnglish
Article number100188
Number of pages24
JournalJournal of Contemporary Accounting and Economics
Volume16
Issue number2
DOIs
Publication statusPublished - Aug 2020

Keywords

  • China
  • First-time reporting
  • Internal control reporting
  • Unqualified
  • Voluntary

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