Study Of The Influence Of Audit Committee Characteristics On Internal Control Quality In Listed Companies

The failure of company governance and internal control may account for the frequentoccurrence of the financial fraud cases recently. As one of the committees affiliated to theboard of directors, the audit committee system is regarded as an effective mechanism toimprove corporate governance, given the functions such as audit assessment for annualfinancial report, selecting and evaluating external auditors, supervising internal audit staff,monitoring of internal control and so on."Sarbanes-Oxley Act" initially stressed theimportance of audit committee at the legal level. In2008, the "basic norms of internal control",promulgated by the Ministry of Finance, officially endow the committee with the duty ofinternal control review, supervision and the coordination of internal control audit etc., whichleads to the rapid development of audit committee among the listed companies in China.Due to the short period of development, the efficiency of audit committee has sufferedlots of questions in governance. Some scholars pointed out that it is just a "facade" project ofthe listed companies based on the signal transmission theory. Therefore, there are increasingconcerns about how to improve the construction of audit committee to increase theefficiency in the academic circles.Internal control is the system designed to achieve the goals of the compliance of lawsand the reliability of financial reports, which involves each staff of the enterprise. To a certainextent, the quality of internal control depends on the efficiency of corporate governance.Meanwhile, it is also the extension and embodiment of corporate governance in businessoperation. As a special institution to supervise the operation of internal control, whether andhow the audit committee affects the internal control is an important topic.This paper firstly combs the researches about the impact of audit committee on theinternal control. Based on the principal-agent theory and corporate governance theory, it digsdeeper into the mechanism through which the characteristics of audit committee would affectthe quality of internal control, and puts forward some propositions for inspection. Then, itcomes to the designation and implement of empirical tests. Having selected samples of1024listed companies, this paper explores the influence of audit committee characteristics on theinternal control progressively, through methods of descriptive statistics, correlation test andregression analysis. As for the measurements of the quality of internal control, the paper draws on the internal control index of2011, which is released by the research group of thelisted corporations’ internal control. Finally, the results of empirical research were analyzed toput forward several propositions for improving the construction of audit committees in thelisted companies.The paper draws the conclusions that the size of the audit committee, together with theproportions of the independent directors and financial experts and the frequency of committeemeetings positively affects the quality of internal control. In addition, the influence is notstatistically significant except the frequency of meetings. The characteristic of independentdirector proportion even doesn’t pass the correlation test. The results indicate that thediligence of the audit committee will contribute to improve the quality of internal control andthe enlargement of committee scale has a positive effect, while the independent directorsmake little difference and the experts are not significantly effective. As a conclusion, thelisted companies are supposed to pay more attention to the performance of independentdirectors and financial experts to improve the operation of audit committee.