Supervisory board, internal control quality, and earnings management

Abstract

Based on data from Chinese A-share listed companies from 2003 to 2022, this study delves into how the supervisory board significantly reduces both accrual and real earnings management through the quality of internal control, revealing its core role in enhancing corporate governance. The findings indicate that the supervisory function of the board not only directly curtails earnings management practices but also indirectly strengthens this effect by enhancing management incentives and external audit quality. Furthermore, both management incentives and high-quality external audits have been proven to effectively modulate the supervisory effects, enhancing their restraining influence on accrual earnings management, while having a minimal impact on real earnings management. Through analyzing different profit motives and corporate governance structures, this study further confirms the environmental sensitivity of the supervisory board's role and the functional differences under various governance contexts, providing empirical support for optimizing corporate governance.