Research On The Evaluation Of Enterprises Internal Control In China

As the modern enterprise reform becomes deeper and deeper and the cases of the failure of the enterprise operation becomes more and more because of the absence or invalidation of the internal control, the appraisal of the validity of the internal control has become a question which was concerned by the academic and the practical.About the internal control appraisal, the United States of America, the United Kingdom and Canada are all developing risk-orientated internal control appraisal and supervision system. Though there are differences in the implications of internal control appraisal and the scope of evaluation, they all evaluate the internal control on the basis of risk, focusing on the implication of the supervision, seeking for the suitable appraisal criteria and requiring disclosing of internal control information. China has recognized and set about establishing the internal control appraisal system. In January and June 2005, HuangJu (who was the vice prime minister of State Department at that time) sanctioned that we should use the SOX for reference to perfect the internal control of Chinese enterprises and authorized that the research and establishment of the guideline of Chinese enterprise internal control should be headed by MOF and State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and SEC cooperated in the work. The Guideline of the Listed Companies Internal Control which was issued by Shanghai Stock Exchange (SSE) regulated that the internal control should be audited and the auditing committee and risk management committee should evaluate the implementation of the enterprise internal control and SSE encouraged the companies to engage independent agency to evaluate the internal control and prepare the appraisal report. Shenzhen Stock Exchange (SZSE) also issued the Guideline of the Listed Companies Internal Control. But there are no rules about how to appraise the internal control and the Guideline is restricted to all listed companies. China Internal Control Standards Committee (CICSC) was founded on 15th July,2006. The Basic Standard for Enterprise Internal Control was published on 28th June,2008. On January 2009, the ED of the Enterprise Internal Control Assessment Guideline and the Internal Control Implementation Guideline were commented publicly. On the basis of the relevant ideas of Contract Theory, Control Theory, Risk Theory and philosophy, this paper perfects the theory of internal control appraisal. And based on the risk, this paper establishes the system of internal control assessment to provide a practical framework. On the basis of the fundamental theory and learning lessons form aboard, the research provides a reference for the setting of the guideline and guidance of enterprise internal control appraisal.This paper reviews history of internal control appraisal both in home and abroad, analyzes the standards above and the pertinent internal control appraisal information to find out the matters which were existed in the criteria and practice of Chinese internal control appraisal. The following matters are pending. There is no effective internal control evaluation system, the safeguard system of internal control evaluation should be enhanced and there are no authoritative information disclosure standards. In order to solve all these questions, the paper uses the lessons from USA, UK, and Canada for reference and in conjunction with status in quo of enterprises internal control appraisal, defines the appraisal entities and substances, establishes the evaluation criteria and evaluation index system using AHP and verifies it using the data of China Unicom. The paper also explores the internal control appraisal method and procedure and information disclosure. The internal control appraisal is to be integrated, that is, the appraisal of internal control by enterprises is the central, and the safeguard mechanism of enterprises both internal and external is the supplemental. New Institutional Economics points out that one system should work with other systems. The efficiency of one system is related with the efficiency of other systems. Thus, enterprises should emphasize the functions of safeguard mechanisms. Safeguard mechanisms includes internal mechanism and external supervision mechanism. The internal safeguard mechanisms compromise of the integration of internal control appraisal and risk management, the conjunction of internal control appraisal and performance evaluation, and the use of IT. In 1993, Jensen said that internal control system is one of the four mechanisms in prevent the conduct of managements from departing form the interests of stakeholders. But because of the failure of internal control, the external supervision mechanism is needed. External supervision mechanism is provided by the supervision of the relevant governmental offices. The purpose of enterprise internal control appraisal is to find out the deficiency of the internal control through appraisal, then to complete and perfect the enterprise internal control. The appraisal and supervision result of the comprehensive effectiveness of the enterprise internal control should be offered to different stakeholders. The release of internal control appraisal information includes disclosure to the internal and to the external. The former is mainly to provide information for the improvement of enterprise internal control, and the latter is to motivate the implementing of internal control appraisal and complete the enterprise internal control using the interest mechanism. The disclosure manners and contents of the former are decided by enterprises themselves, and those of the latter are regulated by governmental offices.The paper is divided into six sections. The first section is introduction which consists of background and significance of research, literature review, and the research framework and main contents. The second section is the analysis of the development and situation and questions which exists in internal control appraisal. First, this section analyzes the development and situation of American, UK, and Canadian internal control appraisal. Then this section analyzes the questions of internal control appraisal by analysing the internal control information and related regulations. The third section is the enterprise internal appraisal system. This is the key section of the paper. The section is about the self-appraisal of the enterprise, which defines the subjects and objects of internal control appraisal, develops a system of the internal control appraisal criteria from the point of risk and index system based on the AHP, designs an appropriate appraisal process and expounds the disclosing of appraisal information through contrast with foreign countries. The fourth section constructs the internal safeguard mechanisms for internal control self-assessment, which include the integration of internal control appraisal and risk management, the conjunction of internal control appraisal and performance evaluation, and the use of IT. The fifth section is the external safeguard system which mainly includes the supervision of relevant governmental offices. Through comparing with American internal control supervision mechanism, the section gives the advices of perfecting internal control appraisal supervision mechanism in China. The sixth section is the research conclusion and perspective.Through research, the paper gains the following breakthroughs. First, the paper clarifies the deficiencies which exist in Chinese internal control appraisal through comparing the statical data of China and America. The paper chooses the newest internal control appraisal informations, combining with the requirements of the Enterprise Internal Control Assessment Guideline, analyzes the width and depth of information disclosure and points out the questions which should be resolved of the internal control appraisal. Second, the paper constructs the internal control self-evaluation index system based on AHP from the point of risk. The internal control appraisal focuses on the effectiveness of the internal control, that is, the appraisal entities review whether the enterprise internal control is effective or not and whether the risk is controlled under the risk appetite and risk tolerance. Based on this consideration, the paper puts focus on the key evaluating points and explores the establishment of the internal control appraisal system from the point of risk and explores the contents and format of appraisal information disclosure. The paper constructs the exercisable appraisal index system using the method of AHP and illustrating its feasibility. The internal control appraisal index framework should be constituted by governmental offices. The concrete exercisable system should be constructed by enterprise themselves. Third, the paper integrates the safeguard mechanism with the internal control appraisal system and brings forward the integrated internal control appraisal system. The paper believes that the internal control appraisal system should be corresponded with other systems, which includes internal safeguard mechanism and external appraisal and supervision system. Through comparing with the experiences of USA, UK, and Canada, the paper gives suggestions of perfecting the internal control supervision system. Third, the internal control appraisal is oriented to be comprehensive. The internal control appraisal system should be matched with safeguard systems. The internal control appraisal system and the safeguard system are all comprehensive. Fourth, the papers points out that the disclosure of internal control appraisal information motivates the internal control appraisal. There are also some limitations in this research.