Empirical Researches On The Effect Of Corporate Governance On Effectiveness Of Internal Control

Economic globalization, our market economy system sets higher demands on management of enterprise. In order to maintain their core competitiveness and adapt to rapid development of economy and volatile market conditions, enterprises put the internal control system in an increasingly important position. The related fields of research for internal controls become the hotspot, steps of introducing the internal control have also gathered in our country. In 2010, appearing of the Internal Control Guidelines is chance of the research.Effective internal control can block up the holes of enterprise's management, prevent mistakes, corruption motivation and enterprise risk. And it can help to keep management stable and orderly, provide institutions and infrastructure for internal and external auditing. Internal control is the escort of enterprise's management, finally service in the objectives of enterprises to maximize their value. Corporate governance, which is also an important part of the modern enterprise system, has been a focus of the academic circles all along. It is the system and principles of decision-making, incentives and supervision and auditing in enterprise management. It is set for the balance of enterprises' rights, responsibilities and interests. It is the surroundings of internal control. There is a certain contact between corporate governance and internal control. For realizing its value, internal control must fulfill its validity in business management. Therefore, effectiveness of internal control is the emphasis in this paper. This article use the method of the theory analysis and empirical test to discuss the questions that how company governance structure impact the effectiveness of internal control, how to optimize the corporate governance and improve internal control standards which is the ultimate goal in this article.The content of the article divided into two parts, one part is theories, another part is empirical test. In the theories part, the concept of effectiveness of internal control is clearly defined. COSO report and some scholars defined "effectiveness of internal control" as the degree of achieving the goal. By the description of contents of Internal Control Guidelines and logical analysis, a new definition of effectiveness is proposed. Effectiveness of internal control included the effectiveness of design and effectiveness of implementation, which are the guarantee in system stratification plane and execution stratification plane for achieving the goal of internal control. What effectiveness of design refers to is:all levels of management and the basic unit staff fellowship must join in the designing process of internal control, which cannot conflict with the laws and regulations, calculates risk fully and reasonably, stops up the shortcoming crack, maintains with the strategic plan, the enterprise culture, the compatibility of innate resources, based on actual situation, and keep complete, reasonable and smooth. What effectiveness of implementation refers to is: environment and company system should support the internal control in the implemental process, voids having such situation that the superintendent is in cahoots corrupting practices and dominates above the system. The internal control system can be carried out in the production and operation thoroughly.Next, the article has listed the theoretical basis of theoretical analysis and empirical research. As the source corporate governance and internal control, Contract theory and principal-agent theory are theoretical basis for discussing relationship between the corporate governance and the internal control in detail. Signaling theory is the basis for disclosure of information of a modern corporate. According to analysis, the higher the internal control efficiency of the company, the more willing to disclose details of the internal control information. Standards of voluntary disclosure of internal control information could reflect the effectiveness of internal control. So the core issue of the empirical study in this article-way of measuring effectiveness of internal control has the base for its designing.In the process of theoretical analysis, an overlap relationship between corporate governance and internal control was put forward on the basis of the review. After that, article made the following views:What corporate governance and internal control expect to achieve ultimately are both the objectives of the enterprise, theoretical etymologies of them all boil down to the development of Contract theory and principal-agent theory, settings of them both follow the principle of mutual dependence and checks and balances, both of them use the control, supervision and inspiration comprehensively. Unification in goals, principles and ways of implement is the key of analysis on relationship between corporate governance and effectiveness of internal control. Next, article analyses the relationship. It was divided into five sections referring to the five key elements of internal control. Equity structure, the board of directors and managers are composed into significant environment of internal control, and also affect other internal environment factors. In governance structure of a company, Board of directors and its professional committee, supervisors, managers contact with risk assessment a lot. Each level of human resource factors itself is the internal risk factor in enterprise, in this way corporate governance impact assessment of risk. Managers are planners and performer of control activities. The board of directors and managers decide the execution of activities, the board of supervisors ensure the implementation of the control activities. The size of the board and personnel structure put a certain degree of influence on the information transfer and communication. When the collective decision-making exceeded the number of reasonable scale, information processing may be put off, the accuracy and completeness of the information also can be affected. The settings of board of supervisors can make the information transferring get effective supervision and review. Managers'attitude to the voluntary disclosure of the level of internal control and disclosure regulation of information in_governance mechanism both decided the transparency of internal control information. The supervising agencies such as board of supervisors, audit committee under board of directors are the main internal supervision institution. They all take the key tasks to monitor operation of internal control, discovery risk timely and make up the loopholes, corporate governance at all levels influence five factors, and then, will affect the effectiveness of internal control's play.In The empirical research section, On the basis of theoretical analysis, the article puts forward 9 assumptions:The relationship between shareholding ratio of the first largest shareholder and effectiveness of internal control is inverted "u-shaped". When the first shareholder is state-owned the effectiveness of internal control is low. The number of the directors and effectiveness of internal control negatively correlated. Meeting times of the board of directors and the effectiveness of internal control have positive relationship. The bigger the board of supervisors scale is, the higher the effectiveness internal control is. Meeting times of the board of supervisors and the effectiveness of internal control have positive relationship. The independent directors'proportion in board of directors and effectiveness of internal control are related have positive relationship. The sum of top three executive pay and effectiveness of internal control have positive relationship. Executives'shareholding and internal control effectiveness are positive related. This article drew lessons from principle of work of DIB, an enterprise risk management technology Co., LTD, in the measurement of effectiveness of internal control. Under the guidance of Signaling Theory, I design 4 grades evaluation standard for the effectiveness of internal control according to the degree of disclosure of China's listed company's internal control information. I choose 2009 China A-share listed companies as sample section data and use statistical analysis and multiple regression models for empirical test. Final results support the most of the hypothesis, only the relationship between the properties of the first largest shareholder and the effectiveness of internal control is not clear, relationship between the proportion of independent directors in board of directors and effectiveness of internal control did not result by assuming and not significant. Then this paper gives reasonable explanations for the two discrepancies.The article puts forward four specific policy recommendations according to the empirical study conclusion: 1. Prevent equity imbalances, if equity is too centralized or is overly dispersed, introduce powerful internal and external supervision and means, internal and external supervision form a system, which can effectively control the internal rights imbalance under ownership imbalances and promote internal control operating smoothly.2. Properly control the size of the board of directors. In the cases of unable to streamline personnel, through clarifying the core of decision makers, the classification for examination and approval and clarifying authority can better implement responsibility and optimize control activities process. In the articles frequency at a meeting of the directors shall be prescribed, the board of supervisors shall supervise the boards'decision, examination and approval efficiency.3. The company should appropriately expand the scale of board of supervisors and use the power of group supervision. The supervisors should be entrusted to the day-to-day affairs, full of continuous monitoring.4. Finally, the executives should be enough motivated to keep its interests and target consistent with company. Fully stock ownership incentive policy will play a more prominent role in promoting effectiveness of internal control.This article mainly embodies the characteristics in the following points:see the essence in the theoretical analysis of corporate governance and effectiveness of internal control. Classical economics theory is introduced as a theoretical fulcrum. On the basis of summarizing related information to internal control, this paper put forward its comprehensive understanding about the concept of the effectiveness of internal control. In empirical part, the application of Signaling Theory and practice of giving four ranks value according to the information disclosure of listed companies on the one hand can simplify the statistical work, on the other hand, realize the index integrity of effectiveness of internal control, also do not break theory support. It can provide a method of reference for subsequent related research. In the policy suggestions, some innovative management regulations were put forward such as classification method for examination and approval of directors. Article limitations are mainly manifested in the empirical research on the defects. Because of the restrictions on data resources,4 grade of classification index cannot reflect the differential of effectiveness of internal control preferably, causing certain deviation in study results of this paper. Due to the limitations of information, representative of the variable-the proportion of independent directors in board of directors is not suitable, maybe replacing it by "proportion of independent directors in enterprise management field in board of directors" variable is much better. The research about suitability of equity concentration is no further.