Research On The Issues Of Internal Control Information Disclosure

The internal control information disclosure has transferred from voluntary disclosure to mandatory disclosure, from QinChuan Development (000837) firstly publishing the internal control self-assessment report on July 17th,2001 to China Securities Regulatory Commission firstly putting forward specific demands on the listed companies' internal control on May 17th 2006 to two Stock Exchanges issuing 'Listed Companies' Internal Control Code in ShangHai Exchange'on June 5th 2006 and 'Listed Companies' Internal Control Code in ShenZhen Exchange'on September 28th 2006. It is very important to explore the relevant issues of internal control information disclosure during the process of the institutional transition. Internal control information disclosure can be a reference for policy makers or standard setters to formulate relevant regulations from the macro-level; it can promote the capital market and optimize investment environment from the meso-level; it also can be guidance for listed companies to improve internal control system and disclose high quality information from the micro-level. The internal control information has become the organic constitute part of a corporate report. Its development relates to the future of listed companies' information disclosures. High quality information disclosure, whichever financial report information or internal control information, is essential for capital market. However, it is still not optimistic for listed companies in ShangHai Exchange and ShenZhen Exchange to disclose internal control information on April 30th 2010, i.e. as of date of listed companies' 2009 annual report disclosure. At present, most of domestic Literature on the status of internal control information disclosure analyzes based on one or several years'annual reports and from different viewpoints. However, most of the countermeasures focus on external restraint mechanisms, for example, law and regulations. Lack of the theoretical system's instruction and institutional environment's support and relying solely on external restraint mechanisms is easy to result in such situation:a very fair proposal, a very ambitious government and a very inefficient result.This dissertation introduces the research thought of financial accounting concept framework (CF) to internal control information disclosure analysis framework, which includes some issues such as what the internal control information disclosure is, who needs the internal control information, which information must be disclosed, and how to disclose the internal control information. Around this main line, the dissertation combines normative analysis and empirical analysis methods. Specifically, it sorts out the situations of regulations' building and academic research and compares different development stages of Chinese and American internal control information disclosures through the comparative research method; it reveals some problems of the internal control information disclosure based on historical and statistical data through statistical analysis method; it summarizes the principles, contents and manners of internal control information disclosure through literature research method.Internal control information disclosure, management of listed companies publish or release information on internal control design, enforcement and assessment to external investors and other stakeholders by given media, which is indispensable for an internal control system. The dissertation clarifies that internal control information disclosure is an economic information system, which helps listed companies' management remove stewardship; deliver effective information to the market; protect investors' informed right. Deeply, it is a multiple agent issue involved in investors, government, regulators, intermediary institutions, listed companies and their members. Internal control information and its disclosure can result in economic consequences, which verify the capital market is not full and effective. Investors are the foundation of a capital market. Their confidence and formation of expectations depend on the protection of investors' interests.Internal control information is mainly disclosed for investors. Its overall objective is to protect investors' interest. However, it is not an independent objective, but a common content of both stewardship and decision-usefulness. In another word, the link of stewardship and decision-usefulness is to protect investors' interest. On this basis, the dissertation proposes four specific objectives, which include fundamental objective—to reveal that economic and business activities are legal; core objective—to prove that financial reports are true and reliable; supportive objective—to show that operating efficiency and effectiveness are continuously improving; and expansive objective—to reflect that strategic plans ensure sustainable development. The objectives of internal control information disclosure are not single, but a system. The overall objective controls the specific objectives, and the specific objectives enrich the overall objective.The key to investors' protection is to enhance the information disclosure quality of listed companies. The principles of internal control information disclosure are the requirements for listed companies disclosing internal control infonnation from such aspects as contents, form and time. The cost-effective principle is also a general constraint. Only if effectiveness exceeds costs, are companies willing to provide internal control information. Reliability principle includes accuracy, neutrality and integrity requirements. Relevance principle includes fairness, timeliness and materiality requirements. Comparability principle includes requirements for comparison among companies and comparison over different periods. Understandability principle includes understandability of companies and that of investors.The dissertation puts forward the concept of'internal control report elements'from the perspective of information disclosure. Organization structure, corporate governance, enterprise culture and information and communication limit a company to an ideal 'control environment'. Control environment is a prerequisite of building and enforcing internal control. It belongs to a hypothesis level in nature. It should be disclosed outside the internal control report. In another word, if control environment exists problems or deficiencies, it is not possible to exist high quality internal control information, and internal control reports also lost the meaning of existence. Risk assessment, control activities and monitoring and amendment comprise basic module of internal control reports, which are called'elements of internal control reports'. Among of them, risk assessment can make economic benefits inflow the company. Control activities can make economic benefits flow normally within the company. And control activities should proceed relatively and orderly. Monitoring and amendment are the assessment process how economic benefits flow within the company. The three elements of risk assessment, control activities and monitoring and amendment also emphasize the time order of before, during and after an event. According to the disclosure order, internal control reports can be read more clearly than other arrangements. Risk assessment is the starting point of an internal control report. Control activities are the core of an internal control report. Monitoring and amendment is the summary and evaluation of risk assessment and control activities. Interaction of three elements outlines a clear process of internal control. Distinction of internal control report elements helps listed companies provide high quality internal control information and reduce disclosure costs. At the same time, it helps investors read clearer and more concise internal control reports. In this way, the information asymmetry between investors and management can be relieved. In addition to the internal control report, internal control information also includes internal control self-assessment comments, internal control attestation report and other internal control information. The internal control report disclosed by management is the core contents of internal control information. The assessment comments published by independent directors and the attestation report issued by CPAs naturally form a double security mechanism of the internal control report.Internal control information can be divided into voluntary disclosure and mandatory disclosure according to disclosure motivation. Internal control information can be divided into public disclosure and private disclosure according to disclosure channels. Internal control information can be divided into periodic disclosure and non-periodic disclosure according to disclosure time. Internal control information can be divided into simple disclosure and detailed disclosure according to levels of detail. The periodic disclosure mainly refers to internal control annual reports. If necessary, listed companies can also disclose voluntarily internal control temporary reports so as to help investors obtain more timely information. Internal control temporary reports mainly include the reports when finding deficiencies, planning to rectify and improve, after finishing rectifying and improving and that of reflecting other circumstances. The dissertation introduces Wallman's 'colored reporting mode into the internal control information disclosure. Specifically, the first level, also called fundamental level, is internal control information disclosure related to legality objective, such as setting relevant bodies, building relevant systems, complying with relevant regulations, which can be disclosed simply. The company need not disclose once more if the information has been disclosed previously and there is no change during the reporting period. The second level, also called core level, is internal control information disclosure related to financial reporting and asset safety objective, which should be disclosed in detail. Detailed information also helps CPAs issue audit reports. The third level, also called supportive level, is internal control information disclosure related to operating objective, for example, measurement and analysis of business risks, which should be disclosed substantially, i.e. disclosure of key factors in the business activities. This level particularly protects risk investors. The forth level, also called expansive level, is internal control information disclosure related to strategy objective, for example, business strategic development plan, which should be disclosed generally. This level particularly protects strategic investors. The 'colored disclosure' mode will be able to enhance the information content of internal control reports, satisfy investors'diverse demands, take into account listed companies' interests, save unnecessary information disclosure costs. The dissertation advocates the combination of voluntary disclosure and mandatory disclosure, that of annual reports and temporary reports, publicly colored disclosure mode from the perspective of investors'protection. The relationship between chapters is as follows. Firstly, it clarifies that the research subject is different from other things, i.e. the essence of internal control information disclosure; secondly, it defines research direction in order to achieve the desired results, i.e. the objectives of internal control information disclosure; after that, it finds a correct path, i.e. the principles of internal control information disclosure; then, it demonstrates what information is key to investors according to the given principles, i.e. the contents of internal control information disclosure; finally, it specifies how to disclose the internal control information, i.e. the modes of internal control information disclosure.Thus, internal control information disclosure is not a shackles that government gives companies, but a natural process. However, there is a gap between theory and practice. Conceptual change is the most important and fundamental change. If listed companies are aware that investors provide the resources for growing and developing the companies and they are close partners. It is a bounden duty to disclose high quality information for investors. Non-disclosure, selective disclosure and false disclosure are irresponsible attitude. The motivation to disclose high quality information would be enhanced. Therefore, change in listed companies' disclosure policy is actually change in disclosure attitude, i.e. from 'passive compliance' to 'active service'.There are many differences between financial report information and internal control information in nature and functions etc. The dissertation can be inevitably one-sided and ill-considered on understanding and application of some concepts during the process of introducing CF's research thought to internal control information disclosure. The dissertation takes a single sample—U.S. for analysis on the status of internal control information disclosures and does not link with relevant activities and experience of more countries. So the conclusion may be one-sided. Because internal control information belongs to declarative information, it is difficult to set up a representative mathematical model. The dissertation only adopts descriptive statistical method in the positive research, which maybe reduce explanatory power. Because the scope of internal control information disclosure is very extensive, the dissertation makes researches only from several theoretical aspects without many relevant systematic researches at home and abroad, and these researches need to be further deepened.It needs to be noted that the development and improvement of internal control information disclosure should not be individual and isolated. The ultimate goal of information regulators is to build a convergent integral corporate reporting conceptual framework (preparation framework of financial statements + information disclosure framework). While internal control information disclosure is only an important part of information disclosures outside financial statements. If the corporate reporting framework is widely recognized by the relevant parties, the future corporate reports will take place revolutionary changes. Firstly, companies need present two types of important reports—financial report and internal control report. Secondly, CPAs need provide services for the two types of important reports—financial report audit and internal control assurance. Finally, information users, especially investors, need read two types of important reports—financial report and internal control report and find out 'treasures' in the two 'gold mountains'. This is bound to be a dynamic accounting change.