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

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.