The Factors And Consequences Of The Disclosure Situation Of Internal Control Deficiencies Of Listed Companies

As a consequence of Sarbanes-Oxley Act of2002(SOX), the research on internal control information disclosure is more and more important, and formed a relatively systematic and comprehensive research field. With the expansion of this study scope, foreign scholars gradually focus on the issues of internal control deficiencies, like the type of defect, firm characteristics and market reaction of defect disclosure. The domestic research focus on the issue of internal control information disclosure, and less attention is paid to the disclosure of internal control deficiencies. Based on this, we will discuss the issues related to the disclose of internal control deficiency of China’s listing corporation, and further empirical analysis the impact and economic consequences of the internal control deficiency disclosures. As such, our study should be of interest to users (regulators, investors, and other financial statement users) and the disclosing party (managers), it will also further improve the internal control system of Chinese listing corporation, and provide theoretical basis and empirical support to promote the innovation and development of internal control system.Based on the related theoretical research of internal control deficiencies disclosure, our study attempts to combine two research methods of theory and practice, normative and empirical, and to prove the factors and economic consequences of the listing corporation internal control deficiencies disclosure. In the aspect of theory research, based on the theory and related research literature of defects of internal control disclosure analyze, we put forward the feasibility and rationality of this study, through the summary, logical deduction method, in-depth analysis of the factors and economic consequences of this topic, which lays a theoretical foundation for the empirical study.In the empirical study, we select the2011and2012disclosed internal control deficiencies information in Shanghai and Shenzhen A-share listed companies as samples, including257listed companies. According to the literature review and theoretical analysis, we provide hypothesis mainly from the complexity, resources available of internal control defects of the company, which influence the disclosure of internal control deficiencies. And hypothesis the economic consequences of internal control defects disclosure from audit fees, auditor resignations and earnings quality. We give logistic regression models and multiple regression models in order to verify these assumptions. Based on the internal control deficiencies disclose related variables’ descriptive statistics and correlation analysis, we can rationality verify the hypothesis, then empirical tests of China’s listing Corporation internal control defects disclose factors and economic consequences, to provide empirical data support for the research hypothesis.The results show that cross-listing of listed companies and larger size of the company will lead to an increase in the number of defects of internal control, and with the increase in the number of defects disclosed in the Company’s internal controls, audit costs is corresponding increase, and auditor resigns appear the higher the likelihood, and earnings quality of the company is higher. Specifically, carries on the discussion on influence factors of internal control defects disclosure, we believe the main reasons of internal control deficiencies are the complexity of the company (including the cross-listing, whether through a merger and reorganization and company growth) and Companies available resources (including losses, company size and operating cash flows). In descriptive statistics, we validated the previous underlying assumptions reasonable, further empirical tests show that in terms of the complexity of the company, B shares or H shares of listed companies which represent complexity can higher the number of disclosed internal control deficiencies. In the terms of available resources of the company, company size variable regression coefficients which respect the company’s available resources showed that the larger the company is, the more number the disclosure of internal control deficiencies are. This is because larger companies have more motivated to improve corporate governance and to improve internal control level, resulting in more disclosed information of internal control deficiencies, in order to voluntarily accept supervision from the market, and promote further improve of the company’s internal control system. And more internal control deficiencies information can give the market the information of a high quality of financial reporting, which will help enhance the company’s image.In addition, the listing Corporation equity nature will also affect the disclosure of internal control defects, when the company is state-owned enterprise, the number of internal control weaknesses are lager, which indicating that compared with non-state-owned enterprises, state-owned enterprises pay more attention to internal control deficiencies disclosure since the internal control system may also be more perfect. The company’s financial leverage also affects the number of disclosed internal control defects, when it comes with higher company’s financial leverage, the number of disclosed internal control weaknesses are more. Because company with higher financial leverage may faces higher level of financial risk, there may be more internal control defects of financial level.As to the economic consequences aspect, we considered internal control deficiencies’ impact on audit fees, auditors resign and earnings quality. The study found that the more internal control deficiencies that listed companies disclosed, the higher audit costs they face, the greater the likelihood of the auditor’s resignation, and company has higher earnings quality:(1) as to the audit fee, because more internal control deficiencies could result in increased difficulty of audit, making auditing business more complex, resulting in firm demand higher audit fees.(2) as to the resignation of the auditor, more internal control deficiencies means higher risk that company faces, the auditor may resign because of higher risk. Meanwhile, we control the previous situation of auditor resign and the financial leverage variables, found that if the company change a auditor last year, this year will attempt to not change auditor; and the higher the financial leverage is, the possibility of the resignation of company auditors appear greater.(3) as to the aspect of the relationship of earning quality and internal control deficiencies, empirical testing found that more disclose internal control deficiencies comes to higher the earnings quality. This is because, according to signaling theory, company has the initiative to pass information to the market to increase transparency of company information, which can avoid the asymmetric information, and also help the company establish a good corporate image, and establish a good reputation. Accordingly, the more internal control deficiencies that the company disclose, indicating their more willingness to accept the supervision of the market, which reflects its more effective corporate governance from the side, as well as higher earnings quality.The innovation and research contributions of this study are mainly as follows:First, we give a general description of the theoretical basis of the related problems of internal control defects disclosure, including principal-agent theory, signaling theory, asymmetric information theory, and systematically reviews the relevant research of internal control deficiencies, on this basis, analyzes the influence factors and economic consequences of internal control defects disclosure, which provide a theoretical basis for the research in this field.Second, this paper especially aiming at the disclose of internal control deficiencies, through the empirical analysis, we found that companies which are more complex and have more available resources disclose more internal control deficiencies. And the more internal control deficiencies that company disclose, the higher audit fees the company faced and the higher possibility of auditor resignation, as well as the higher corporate earnings quality.Third, based on theoretical analysis and empirical testing, and combined with the actual situation of our country, respectively from the strengthening of the company "self-discipline", regulators "heteronomy" and improve the information users professional level to improve China’s listing Corporation internal control defects rectification and repair situation, and put forward policy recommendations, which has strong practical significance.At the same time, this study has certain weaknesses:first, we use the number of disclosed internal control deficiencies to reflect the situation of listed companies’internal control deficiencies disclosure may be not suitable, since it cannot complete reaction the situation of deficiencies. With the improving of internal control supervision system and standardization of internal control information disclosure, we can clear classification internal control defects, and give a more suitable remediation variable. Secondly, this study only use data of2011and2012, may cause the results appeared to be some deviations and not representative. In a subsequent study, along with the number of year that the company discloses internal control deficiencies, and more strictly enforced of internal control norms system, we can get several years of panel data on issues related to the disclosure of internal control deficiencies empirical research, to make the results to be more accuracy and reliability.