Internal control and earnings persistence

In this paper, based on the data from non-financial A-share companies listed in Shenzhen and Shanghai Stock Exchange from 2007 to 2010, we assess how internal control quality and changes in internal control quality affect earnings persistence. We argue that internal control quality is positively related to the earnings persistence and the persistence of earnings components (accrual and cash flow). We suggest that improving the internal control quality will bring significant positive impacts on the persistence of earnings, as well as its components-accruals and cash flows. We can prove that high quality internal control could reduce, or even avoid the errors of accounting estination, and improve earnings persistence, which indicates that companies´establishment of internal control in China has made certain progress.