Theoretical Research On Internal Control Of Hierarchical Organization

In the context of hierarchy and on the base of philosophy, sociology, economics and organization theory, this paper attempts to develop a set of internal control theories from organizational perspective by regarding internal control as an important organization phenomenon. It's believed that a set of internal control theories should provide answers for the following basic questions:firstly, how to define the internal control in the context of hierarchical organization? Secondly, in order to maximize the basic value of internal control existence, what are the principles and tenets to design internal control? Among them, the first questions define the nature of internal control, and the second question is associated with mechanism design of internal control. By providing tentative solutions for the two basic questions, the theory developed by this paper explains the nature of internal control theoretically and provides an logically consistent design language for the construction of internal control.Firstly, this paper deals with the first questions. As an actual measure of the uncertainty of the achievement of organization objective, the deviation exists because of behavior anomie and behavior failure of the organization member. Among them, opportunism is the psychological basis of behavior anomie, and bounded rationality is the biological basis of behavior failure. By involving behavior anomie and behavior failure respectively, opportunism and bounded rationality constitute the roots of human nature for the existence of deviation and furthermore provide basic premise for the existence of internal control as an organizational phenomenon. In order to deal with opportunism and bounded rationality effectively, information sharing and knowledge integration among organization members accordingly evolved into two basic organizational strategies. Among them, information sharing may be helpful to decrease opportunism of organization members, and knowledge integration may help to mitigate bounded rationality of organization members. In order to achieve effective information sharing and sufficient knowledge integration, authority diffuses vertically along the hierarchical structure and horizontally on the same hierarchical level. By means of authority diffusion, a power system forms in the organization. Finally, this paper defines the internal control an integral process of authority diffusing, information sharing and knowledge integration. By structuring the relation mode among organization members, internal control promotes the formation of hierarchical order, and provides rational assurance for the achievement of organization goals. This paper realizes evolution of internal control nature from process perspective to order perspective.Based on design methodology and power paradigm, this paper develops a set of logically consistent conceptual framework for internal control design with institutional analysis. Conceptual framework appears as a series of basic concepts applied in design practice and design research of internal control firstly. These basic concepts consist of behavior and relation as research objects, task and activity as basic analysis units of internal control, behavior control as basic control mode of internal control, and behavior constraint and behavior optimization as basic functions of internal control. Based on inner relation among these basic concepts, this paper generalizes the logical relation and controlling relation between behavior and activity, and defines internal control design as activity design realistically. At the same time, by referring to analysis logic of TCE, this paper provides a thinking path for internal control design by conceptualizing the logic structure of the design process of internal control based on those basic concepts. The design process of internal control passes through organization, task and activity top-down, and consists of the analysis of organization context, task identification, task analysis and activity design. Finally, by relating task attributes and activity chain structure and activity spot structure respectively, this paper obtains relation matrixes between task attributes and activity chain structure and between task attributes and activity spot structure. In sum, basic concepts of internal control design and logic structure of the design process of internal control consist of an integral conceptual framework jointly.Based on the conceptual framework, this paper implements an equilibrium analysis on internal control design with principal-agent model and comes up with five design propositions. The equilibrium analysis consists of three levels:an agent model, two-agent model and N-agent model. The analysis of an agent model suggests that the existence of internal control is necessary to reduce probability of frauds and errors of organization members because wage incentives are not sufficient to prevent frauds alone. Furthermore, although the penalty imposed after exposure of frauds would increase the reserved amount and reduce fraud motivation, but the increases in fraud effort should influence the reserved amount to a larger extent by involving more disutility. So, ex-ante internal control design will reduce probability of frauds more sufficient than ex-post penalty mechanism. The analysis of 2-agent and N-agent model reveals that the reserved amount of the agent relates to the length of activity chain positively. With the increase in the length of activity chain, fraud motivation of the agent will become lower. In addition, when the number of employee be given, principals will minimize the probability of fraud and error and organization cost by maximizing the length of activity chain and ex-post penalty.