An Empirical Study On The Effect Of Internal Control Deficiencies On Value Relevance Of Accounting Information

Internal control is an important system arrangement to improve thecorporate governance. When there are deficiencies existing in the mechanismdesigning or operating procedure, the company performance and quality of theinformation on financial reporting will be affected. As the value relevance ofaccounting information is an important feature of the quality of financialreports, it will also be affected by internal control deficiencies to some degree.By inserting variables on behalf of internal control deficiencies and theinteraction of internal control deficiencies and accounting information, weimproved the Ohlson linear dynamic residual income valuation model. Alsowe inserted control variables considering the special contract culture andownership structure in our country. We used accounting data and informationof the internal control deficiencies of all A-Share listed companies from2008to2010, screened internal control deficiencies samples out from the samplepopulation in the light of previous studies and the status quo of the disclosureof internal control deficiencies. Thus we completed an empirical study on theeffect of internal control deficiencies on value relevance of accountinginformation.The results approved that internal control deficiencies reduced thecapacity of accounting information on explaining the stock price and also reduced the value relevance of net book value of assets and residual income,while the value relevance of net book value of asset declined more thanresidual income. The conclusion of this study can prompt investors to makedecisions more comprehensive over the analysis of all information of listedcompanies and strengthen the demands for internal control quality information.The results also warn that regulatory authorities should promote the scheduleof listed companies’ internal control system construction and to strengthen itsoversight and punitive policies of the disclosure of internal controlinformation to protect the interests of investors and increase the efficiency ofsecurities market.