The Research On The Validity Of Internal Control Based On Investor Protection

Internal control is one of the most fundamental tools and methods of management inthe modern enterprise system, which is a strong backing for healthy and sustainabledevelopment of enterprises. With the rapid development of the economy and the changingof market environment, companies have to face more and more internal and external risks.In recent years, financial fraud scandals have been revealed in some domestic and foreigncompanies, which have made investors suffer heavy losses. As an important means of riskprevention and control, internal control has got more attention of a growing number ofacademics, government and company. The United States Congress promulgated the"Sarbanes" aux bill in July2002. It has attracted worldwide attention and the mostimportant goal of the bill is to ask the public corporations to do internal control well, andalso pay more attention to the protect investors, to protect the interests of shareholdersfrom management of infringement, and to protect small shareholders from violations of thelarge shareholders. Then followed by many other countries, various policies have beenintroduced. In China, the Ministry of Finance and other five ministries jointly issued the"basic norms of internal control" for the special circumstances of our country in2008, andthen promulgated three guidelines. As a result, China’s listing Corporations in theconstruction and evaluation of internal control are to be followed, which greatly promotedthe use of company internal control and effectively protected the interests of investors. Sothere is a close relationship between investor protection and the effectiveness of internalcontrol.Internal control is a complex concept, including all aspects of the running of thecompany. It is also a complicated process for the evaluation of the effectiveness of internalcontrol, especially in the selection of evaluation index. Based on the academicachievements of the predecessors, this paper will start from the micro level to selectinternal and external evaluation indexes as far as possible to research on the effectivenessof internal control.Firstly, based on the domestic and abroad research literature on the effectivenessof internal control, this paper combs the development of internal control theory and defines the concept of internal control. Also research on internal control and the protection ofinvestors at home and abroad in recent years is summarized, which provides the researchfoundation for articles. Secondly, from the micro perspective, based on the contents of thearticle, it designs an internal control evaluation system of18indexes including five aspectssuch as the control environment, risk assessment, control activities, information andcommunication, the supervision. Subsequently it selects the relevant data of Shenzhenmotherboard A shares of manufacturing industry in2011, using the statistical descriptionand regression analysis and other research methods to study the influence of listedcorporations investor protection on the effectiveness of internal control, and theconclusions are as follows:(1) the effectiveness of internal control of our listedcorporations is generally not high, many companies internal control mechanism, therelevant rules and regulations exist in name only, so it does not really play its role andthere is still much room for improvement of the internal control utility.(2) the agency costand effectiveness of the internal control between shareholders and managers have anobvious negative correlation, significant at the5%level. With the decline of agency costsbetween large shareholders and managers, the effectiveness of internal control of the listedcorporations will increase.(3) the agency cost and effectiveness of the internal controlbetween large shareholders and small shareholders have an obvious negative correlation,significant at the5%level. So reducing agency costs between them can be helpful toimprove the effectiveness of internal control.(4) the enterprise performance and theeffectiveness of internal control have significant positive correlation, significant at the10%level. It can conclude that high performance contributes to effective implementation of theinternal control mechanism.The innovation of this paper lies in:(1) jumping out of the traditional limitations ofthe research, combining with the actual situation of listed corporations management,establishing internal control evaluation system from the perspective of investor protection,trying to find out the internal relations of the internal control and investor protection,hoping to provide some references for the practice of internal control development.(2) onthe basis of previous studies, combined with the contents of this paper, it designs an internal control evaluation system of18indexes including five aspects such as the controlenvironment, risk assessment, control activities, information and communication, thesupervision. On one hand, it can simplify the workload; on the other hand, it considers theintegrity of the basic elements of internal control without losing the theoretical support.