Internal Control And Employee Policy

With the continuous development of modern enterprise theory,corporate governance has not only focused on the conflict of interests between managers and shareholders,but also on how to weigh the relationship between all stakeholders.Employees are the most closely related to the operation and the largest number profitable groups within the company.However,how to improve employeemanagement efficiency and strengthen employee benefits through improved governance mechanisms has been neglected in researches.The introduction of a series of laws and regulations concerning employee interests,such as the Labor Contract Law and the Employee Stock Ownership Plan,shows that the relevant government departments attach importance to employee issues by constraining and stimulating corporate behavior.However,enterprises at the executive level face the conflict of interest between the goal of company’s greatest value and the protection of employees’interests,which also requires the internal mechanism to play a greater role in coordinating the relationship among company,manager and employee.Internal control is an important mechanism to improve the compan’s decision-making and release the internal interest conflicts in company by improving the information quality.After the US Congress enacted the Sarbanes-Oxley Act and the five ministries and commissions issued the "Basic Norms of Enterprise Internal Control" in China,the theoretical and practical researches of internal control entered a new upsurge.Different from the early researches on how to strengthen the financial reporting quality with internal control,more and more scholars in recent years have paid attention to the role of internal control in enhancing the efficiency of business management.Employees are both practitioners and supervisory objects of internal control,thus how internal control affects employee policies deserves more attention.Based on this,this paper uses the A-share listed companies in 2007-2017 as samples,to study the relationship between internal control quality and employee policies.Based on the dual perspectives of human resource allocation and incentives,this paper examines employee policies from two aspects:employment policy and incentive policy.The incentive policy is further divided into the incentive policies of pay and equity.The empirical results show that:First,internal control can affect the company’s employment policy.Internal control quality can improve labor investment efficiency in companies,indicating the role of internal control in promoting the optimal allocation of human resources.Further,the impact of internal control on labor investment efficiency is more significant in non-state-owned enterprises,the growth stage of the enterprise life cycle,and firms with higher employee education.Additionally,when internal control quality is higher,labor investment efficiency can better promote employee efficiency.Moreover,internal control can have an impact on labor investment efficiency in terms of both excess employee and employee shortage.Secondly,from the perspective of internal pay gap,it is found that internal control can afect the pay gap between management and employees.When the internal control quality is higher,the pay gap between management and employees is greater.Further tests found that the internal control has a more significant impact on pay gap when the management’s shareholding ratio is lower,the employee’s external pay fairness is lower,and the management ability is stronger.In addition,this paper finds that high-quality internal control increases the positive impact of pay gap on company’s value.These results show that internal control can not only improve the company’s remuneration incentive mechanism,but also promote the value of the company.Third,in terms of employee equity incentives,internal controls can increase the possibility of implementing Employee Stock Ownership Plan(ESOP)in companies and the performances after ESOP.When internal control quality is higher,the company is more likely to implement ESOP,and high-quality internal control can improve the long-term performances of companies carrying out ESOP.Further researches found that the above-mentioned effects of internal control are even more significant in companies with lower levels of compensation incentives,non-state-owned enterprises,and companies with greater volatility.The results suggest that internal control can improve employee incentive in different contexts,also enhance positive impact of employee incentive on company performance.In summary,the results above show that,the quality of internal control affects the company’s employment policy and different incentive policies,then improve the company’s performance and long-term value through these policies.Therefore,internal control can play a management role at employee policy level,and achieve the objective of internal control to improve operational efficiency and effectiveness. This paper make following innovation and contribution.Firstly,researches on the economic consequences of internal control are enriched from the employee level.Literatures on internal control’s economic consequences involves various types of interest entities such as investors,managers,auditors,governments,suppliers,analysts,etc.,but has little concern about how internal control affects employee,which is the stakeholders with largest number in companies,and the employee policies and employee benefits associated with it.This paper analyzes the role of internal control in improving human resource allocation,corporate compensation system and employee motivations through empirical methods,systematically explores the impact of internal control on employee policies.Secondly,this paper add the growing literature on employee issues in the field of accounting and finance.The combination of research on employee issues and accounting behaviors is very limited,and it is tend to focus on the negative impact of employee protection policies on the companies’ values,and lacks discussion on how to make the employee policies more effective and improve the common interests of employees and company through internal mechanisms.This paper uses the "Application Guidelines for Enterprise Internal Control No.3:Human Resources" as reference to study the role of internal control in strengthening employee management and reducing human resource risk,and provide a new ideas for seeking"win-win" in corporate interests and employee benefits.Finally,this paper tries to add employee to the discussion of traditional agency theory on the contradiction between management and shareholder,and explores in depth how to reconcile potential interests among different stakeholders through internal mechanisms.Moreover,this paper finds that internal control promotes the company’s operational efficiency by improving employee policies,indicating that the implementation of internal control can improve operational efficiency while ensuring compliance objectives.In addition,in practice,this paper has certain implications for the government’s policy formulation,also the listed companies’ internal control construction and employee management.Listed companies should strengthen the internal control construction to improve the rationality of employee policies,to protect the interests of employees and strengthen employee incentives,which are taken as effective ways to achieve business objectives and enterprise value,and to evoke employees’ attention to internal control construction.Relevant departments should also issue laws and regulations,promoting enterprises to protect the interests of employees by improving internal mechanisms,strive to achieve economic benefits and social benefits together.