Correlation Study On The Effectiveness Of Chinese Listed Companies Board Characteristics And Internal Controls

With the increasing occurrence of financial frauds both at home and abroad, internal control has become a hot issue for research internationally and domestically. As one of the effective measures to optimize the modern enterprise mechanism, internal control plays a vital role in upgrading operational and managerial level of listed companies and in avoiding risks. From a global perspective, the United States is in a leading position in terms of theoretical research and practical operation of internal control. The Integrated Framework of Internal Control issued by COSO in1994and the Sarbanes-Oxley Act approved by the Congress in2002which responded to the relentless financial fraud cases, have already been recognized and applied world-wide. On June28th2008, five national departments in China, namely the Ministry of Finance, National Audit Office, CSRC, CBRC and CIRC, jointly issued the C-SOX (or the Fundamental Standards for Enterprise’Internal Control). The issuing of C-SOX signifies the establishment of regulated framework of internal control in our country. Meanwhile, the board of directors, an important factor of company’s governing, directly decides the resource allocation efficiency and the development direction of the company. It also plays an irreplaceable role in strengthening effect and enhancing efficiency of company’s internal control. Against this background, this paper, which includes the internal control into the framework of board characteristic, conducts a comprehensive and deep analysis of the internal control problems related to the listed companies in our country and of the relation between board characteristics and the internal control efficiency.Firstly, this paper defines the concepts of board characteristics, internal control and other concerning items and provides a detailed introduction to the theoretical foundation of these key concepts. By reviewing the domestic and international literature on board characteristics, internal control efficiency and the relation between the two, the author finds a clear research direction for this paper. Secondly, taken the status quo and existing problems revealed by the board and internal control of the listed companies into consideration, this paper analyzes the board characteristics, internal control efficiency and brings up a research hypothesis. Thirdly, by defining the board characteristics of the listed companies in China, the major characteristics can be summarized as instruction characteristics, behavior characteristics, incentive characteristics and quality characteristics. At the same time, this paper establishes an internal control efficiency evaluation model for the listed companies in China and adopts the multiple-regression model to test the theory. Finally, on the basis of theoretical deduction and empirical test, the author draws a conclusion and comes up with policy recommendations for the listed companies in China to upgrade their internal control efficiency.The conclusions of this study are as follows:first, in terms of the relation between board characteristics and internal control efficiency of the listed companies, the scale of board is in negative correlation to the internal control efficiency; while the proportion of independent directors is in positive correlation to the internal control efficiency. What’s more, the establishment of auditing committee can’t effectively enhance the internal control efficiency; while, separating the duties of chairman and general manager exerts a positive influence to the internal control efficiency. Second, as far as the relation between the board behavior characteristics and the internal control efficiency is concerned, the time of annual board meeting does not affect the internal control efficiency. Third, considering the incentive characteristics of the board, the total remuneration of the top three directors exerts an evident influence to the internal control efficiency. The average remuneration of the directors has a positive correlation to the internal control efficiency, while the shareholding ratio of neither the board nor the chairman has an apparent effect to the internal control efficiency. Last but not least, the relation between quality characteristics of the listed company’s board, the average age and education background will not affect the internal control efficiency of the company.In the conclusion part, this paper first summarizes the research results. Then it points out the shortcomings of the study, such as failing to provide detailed index to examine the board characteristics and overlooking the side-effect of internal control’s effectiveness to the board characteristics. These all provide a direction for further research.