A Study On The Material Internal Control Deficiencies Of Listed Companies In China-empirical Evidence From Financial Fraudulent Practice

Financial frauds of listed companies have led to significant loss to Chineseinvestors and also the entire Chinese society, examples can date back to not onlyHainan Mingyuan fraud case in1980s, Guangxiayin, Lantian, and Daqinglianyi at thebeginning of this century, but also Lvdadi and Wanfu Shengke occurred recently.These frauds are reflections of some great defects in the internal control process oflisted firms. However, many frauds may still remain uncovered as the lack of specificregulatory standards on internal control, making it possible for companies to easilyhide negative information in disclosure. Therefore, identifying defects in the processof internal control are relevant and extremely urgent.This thesis introduces methodology and results from previous studies. Theliterature review consists of three parts: definition of internal control, relevant factorsresulting in internal control problems, and some economic effects that could be raised.This follows by the motivation of study which is also the innovation of this paper, thatis, by studying companies that have already been confirmed to have internal controlissues, the validity and implications of findings in this paper could be significantlyimproved compared to previous studies. After that, several theories such asbureaucracy, medium and small investors pretection and Grossman-Hart-Mooremodelare referred to demonstrate that financial frauds could be better controlled byperforming complete internal control. This paper take the example of Wanfu Shengketo study the factors resulting in financial fraud. In order to further confirm the caseresults, this paper uses sample formed by the107listed companies that has beenclaimed to have financial infidelity by CSRC in2012. Based on the Guidelines onenterprise internal control and other related literatures, a series of indices that reflectthe defects in elements of the existing internal control is detected, and a descriptivestatistical analysis has been conducted correspondingly. The result of descriptivestatistical analysis gives the significance of these defects. The main findings in thispaper is that environment control, activity control, and communication are the mostsignificant problems in terms of internal control, and they should be identified as greatdefects by the regulator and included in disclosure. Lastly, this paper offerssuggestions for policy making and implications for future research.