The Research On The Factors Which Influence The Effectiveness Of Internal Control

As an important aspect of modern enterprise system, internal control can effectively prevent distortion of accounting information, and prevent significant financial fraud and risk, thereby it not only enhancing the reliability of financial information, but also increase the transparency of accounting information of listed companies.However, as China’s implementation of the internal control system not too long, and the institution and regulations related to internal control are not perfect, resulting in the current internal control of Chinese enterprises lack of supervision and internal constraint mechanism, the result of implementation of internal controlare unsatisfactory. Many researches prove that most of these problems are created by the internal and external factors of internal control. Therefore, it is important to investigate the factors of which impact the effectiveness of internal control. However, the existing researches mainly concentrate in the evaluation of internal control system effectiveness, disclosure of internal control deficiencies, and the economic consequences of internal control. Even though some literatures researched the factors of which impact the effectiveness of internal control, the discussed mostly limited to internal factors such as corporate governance, there is few literature from the internal and external environment to study the effectiveness of internal controls. So this paper researches the internal and external environment factors which affect the effectiveness of internal control.There are many factors can impact the effectiveness of internal control, but the most fundamental and basic factor is the institutional environment which includesexternal and internal institutional environment. External institutional environment is measured by the degree of market-oriented, which includes three sub-factor, those are the relationship between government and the market, the composition of the market economy and the degree of market development. Internal institutional environment is measured by corporate governance system, which includes the ownership structure, the board characteristics, governance layer incentives and other factors. The reason to begin with research in such approach is that, the degree of market-oriented is the foundation of establishment and implementation of internal control, which from the degree of affect that enterprises impacted by the government action, the amount of resources that enterprises can get from market and how difficulty to get them, as well as the composition and vitality of a market economy to reflect the effect of the implementation of internal control. Corporate governance is the micro-foundation to ensure internal control operation effectively, it from the basis of property right, the features and efficiency of core decision-making agencies, as well as internal oversight reflects the effectiveness of internal control. The two go together, and combined effect the operation of internal control.This paper first review the basic theory of institutional environment, then1649Shanghai A-share listed company in2011were selected as research data, through principal component analysis, seven principal components were extracted and to do regression analysis, which has systematic analysis the influence of market-oriented and corporate governance on the effectiveness of internal control. We have drawn the following conclusions:the relationship between government and the market, the proportion of non-state-owned economy, the degree of market development, the total capital ratio of the outstanding shares, the largest shareholder equity ratio, the second to the tenth largest shareholding ratio, the proportion of independent directors, the number of special committees have a positive correlation with the effectiveness of internal control, it verified that the degree of market-oriented and the basis of property right have greatest impact on the effectiveness of internal control; The total capital ratio of state-owned shares, the chairman serves as the general manager have a negative correlation with the effectiveness of internal control; total remuneration of the directors, officers and supervisors, the number of shares held by the executives and supervisors have no correlation with the effectiveness of internal control.The research shows that the external institutional environment greatly affect the enterprise internal control, the difference institutional environment of areas and provinces in china resultin the varied effectiveness of internal controls. The soundness of the corporate governance system also has an important impact on the effectiveness of internal control. Therefore, the provinces should further promote the construction of market-oriented process, and create a favorable external institutional environment for enterprise development. In order to better establishment and implementation of internal control, companies should improve corporate governancefrom aspects of ownership structure, board characteristics and governance layer incentives.