The Impact of Internal Controls Regulation on Earnings Quality and Earnings Management: Evidence from Japan

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  • 内部統制報告規制が利益の質と裁量行動に与えた影響
  • ナイブ トウセイ ホウコク キセイ ガ リエキ ノ シツ ト サイリョウ コウドウ ニ アタエタ エイキョウ

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Abstract

This study examines whether internal controls regulation (J-SOX) impacted on earnings quality and the purpose of earnings management for public firms in Japan. I focus on accruals quality, accuracy of cash flow prediction, and discretionary accruals as proxy of earnings quality by comparing a sample of 60 firms that disclosed material weaknesses (MW firms) with a paired sample similar on size and industry. I find the following: (1) Accruals quality and forecast accuracy improved after the passage of J-SOX for control firms. (2) While accruals management for MW firms was observed even after the passages of J-SOX, real management was not observed for control firms in the post-J-SOX. (3) As for accruals management for MW firms, accruals quality is significantly associated with accruals, suggesting that it is likely reflecting managerial opportunism. On the other hand, as for accruals management for control firms, accruals quality is not significantly associated with accruals, suggesting that the purpose of the accruals management for control firms seems to be changed to the informativeness.

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