Internal control weakness and accounting conservatism in China

Ji, Xudong, Lu, Wei and Qu, Wen 2016, Internal control weakness and accounting conservatism in China, Managerial auditing journal, vol. 31, no. 6/7, pp. 688-726, doi: 10.1108/MAJ-08-2015-1234.

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Title Internal control weakness and accounting conservatism in China
Author(s) Ji, Xudong
Lu, Wei
Qu, WenORCID iD for Qu, Wen
Journal name Managerial auditing journal
Volume number 31
Issue number 6/7
Start page 688
End page 726
Total pages 39
Publisher Emerald Group Publishing
Place of publication Bingley, Eng.
Publication date 2016-06-06
ISSN 0268-6902
Summary Purpose: The purpose of this study is to investigate the impact of internal control weaknesses on accounting conservatism in Chinese listed firms. It also investigates the relationship between the demand for external audit and accounting conservatism, and whether additional assurance of internal control reports (ICRs) can mitigate the negative impact of ICWs on accounting conservatism.

An empirical research approach is taken through the use of ordinary least squares (OLS) models and hand-collected internal control weakness data from ICRs released by Chinese listed firms.

Findings: The results of this paper show that the existence of ICWs has a negative effect on accounting conservatism in China. Further, the results demonstrate that both accounting-related and non-accounting-related ICWs affect accounting conservatism. The authors also find that there is a complementary relationship between accounting conservatism and the demand for additional assurance of ICRs, and additional assurance of ICRs can mitigate the negative impact of ICWs on accounting conservatism.

Practical Implications: This study provides timely evidence to Chinese regulators of the possible economic consequences of the official implementation of internal control standard in China from 2012. The findings of this paper can also benefit regulators around the world and, in particular, the regulators in emerging markets that are considering implement regulations similar to the US SOX.

The paper demonstrates that a wider scope of ICWs, including non-accounting-related ICWs, also has a significant impact on accounting conservatism. Therefore, this research provides a more general evidence on the relationship between internal control quality and accounting conservatism.
Language eng
DOI 10.1108/MAJ-08-2015-1234
Field of Research 1501 Accounting, Auditing And Accountability
150103 Financial Accounting
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Emerald Group Publishing
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Accounting
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