A Study On The Influence Of Internal Control Effectiveness On Financial Risk

Since the global financial crisis, corporate bankruptcy events occur frequently,although scholars have many explanations for the failure of these companies, but thesecompanies’ internal controls exist defects is one of the important reasons for triggeringcorporate financial risk. Thus, how to enhance the effectiveness of internal control and theability to guard against financial risk, has become a prominent and urgent problem. Themain purpose of this study is to investigate the influence of the effectiveness of internalcontrol on financial risk and find out the reasons which caused financial risk. Thus thecompanies can strengthen their financial risk prevention capability. For the characteristicsof this study, the paper uses research methods of literature analysis and the empirical studymethod.First of all, the study defines the concept of the effectiveness of internal control andfinancial risk and summarizes related theories on the basis of reviewing related research athome and abroad, meanwhile analyzes the relationship between the effectiveness ofinternal control and financial risk theoretically.Secondly, the paper sets evaluation indexes of the effectiveness of internal controlaccording to China’s "Internal Control Basic Norms", the norms’ supporting guidance andAmerican COSO Committee’s "Internal Control Framework", then on the basis ofselecting sample companies and collecting data, the paper uses the method of entropy lawto calculate the weight of each evaluation index and construct the evaluation model tocalculate the evaluation indexes.Thirdly, this paper uses the effectiveness of internal control, the effectiveness of thecontrol environment, the effectiveness of the risk assessment, the effectiveness of controlactivities, the effectiveness of information and communication and the effectiveness of thesupervision as explanatory variables, and uses the financial risk as explained variable,while adding enterprise size, age listed, the company’s growth and law as control variablesinto the model, constructed two research models，then using2010-2012yearly data oflisted manufacturing companies, this paper empirically studies the relationship between the effectiveness of internal control and financial risk and gets the empirical analysisresults.Finally, in order to reduce the enterprise financial risk, this paper proposedcountermeasures and suggestions from optimizing control environment, improving riskassessment mechanisms and strengthening supervision to improve and optimize theinternal control according to the conclusions of the empirical research.