M.A. Thesis:

Internal Control Weakness Disclosure and Earnings Quality

Significant weaknesses in the internal control system can increase the likelihood of errors and financial disclosure. It can also increase the probability of opportunistic manipulation of corporate profits. Weak internal controls can create more opportunities for opportunistic distortions of profit and deliberate and unintentional mistakes in accounting estimates and profit manipulation. Opportunistic manipulation of profits can be a benchmark for low quality profits. Therefore, it can be argued that the disclosure of internal control weaknesses in the audit report can affect the quality of profit. The main purpose of this study was to investigate the relationship between the internal control weakness disclosure and earnings quality. To measure the earnings quality, has been used discretionary accruals (earnings management). Also, in this study, the weaknesses of the internal control system of the client are divided into two categories of internal control weaknesses associated with accounting and internal control weaknesses unrelated to accounting. Multivariate linear regression model was used to test the research hypotheses. The research community included 140 companies selected by screening method in Tehran Stock Exchange during the period from 2011 to 2016.. The results of this study showed that the main hypothesis of this research was that there was a negative and significant relationship between disclosure of internal control weaknesses in audit report and earnings quality. In other words, internal control weaknesses reduce the earnings quality. The findings of the study showed that there is a negative and significant relationship between the disclosure of the weaknesses associated with internal control accounting in the audit report and earnings quality. In fact, the internal control weaknesses associated with accounting reduce the earnings quality. The results of the research show no significant relationship between the disclosure of weaknesses unrelated to internal control accounting in the audit report and the earnings quality.

Keywords: : Internal controls, Internal Control Weakness Disclosure, Earnings quality, Discretionary accruals.