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Voluntary Disclosure of Internal Control Weakness and Earnings Quality: Evidence From China

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  • Ji, Xu-dong
  • Lu, Wei
  • Qu, Wen

Abstract

Using a sample of 1059 listed firms that voluntarily provide internal control reports in the period 2010–2011, this paper investigates the relationship between voluntary disclosure of internal control weaknesses (ICWs) and earnings quality in China. Our results show that earnings quality, measured by absolute discretionary accruals, is significantly associated with voluntary disclosure of ICWs. Furthermore, our results demonstrate that both accounting-related and non-accounting-related ICWs affect earnings quality. This study contributes to the internal control literature by extending the evidence for ICW disclosure to an emerging economy and examining the impact of disclosure of different types of ICWs on earnings quality. This study demonstrates that the control of non-accounting-related ICWs is critical for enterprise risk management.

Suggested Citation

  • Ji, Xu-dong & Lu, Wei & Qu, Wen, 2017. "Voluntary Disclosure of Internal Control Weakness and Earnings Quality: Evidence From China," The International Journal of Accounting, Elsevier, vol. 52(1), pages 27-44.
    • Handle: RePEc:eee:accoun:v:52:y:2017:i:1:p:27-44
    DOI: 10.1016/j.intacc.2017.01.007
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    Cited by:

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    2. Wang, Kun Tracy & Wu, Yue & Ho, Kin-Yip, 2021. "Internal control reporting and cost of bond financing: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1323-1346.
    3. Mounia Boulhaga & Abdelfettah Bouri & Hany Elbardan, 2022. "The effect of internal control quality on real and accrual-based earnings management: evidence from France," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 33(4), pages 545-567, December.
    4. Li, Zhe & Wang, Bo & Wu, Tianlong & Zhou, Dan, 2021. "The influence of qualified foreign institutional investors on internal control quality: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    5. Deng, Kebin & Hu, Fang & Tian, Gary Gang & Zhong, Ziying, 2022. "Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    6. Adrian-Cosmin Caraiman, 2020. "Responsibility for Internal Control in Corporate Governance," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 612-618, December.
    7. Albertina Paula Monteiro & Joana Vale & Amélia Silva, 2021. "Factors Determining the Success of Decision Making and Performance of Portuguese Companies," Administrative Sciences, MDPI, vol. 11(4), pages 1-24, October.
    8. Wei Huang & Tingting Ying & Yun Shen, 2018. "Executive cash compensation and tax aggressiveness of Chinese firms," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1151-1180, November.
    9. Mohamed A. Wahdan, 2018. "Impact of a Practical Flowcharts Approach on Educating the Control Risk Assessment," Accounting and Finance Research, Sciedu Press, vol. 7(2), pages 1-1, May.
    10. Rezaee, Zabihollah & Dou, Huan & Zhang, Huili, 2020. "Corporate social responsibility and earnings quality: Evidence from China," Global Finance Journal, Elsevier, vol. 45(C).

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    More about this item

    Keywords

    Internal control weakness; China; Types of ICWs; Earnings quality;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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