Research On The Effect Of Corporate Governance Characteristics Over The Remediation Of Internal Control Weaknesses

Along with the promulgation of 《 The Basic Norms of Enterprise Internal Control 》 and supporting guidelines in China,the disclosure of listed companies’ information of internal control which was voluntary in the past turns to be compulsory.From the internal control self-evaluation reporting published by listed companies,the internal control audit report issued by CPAs and other signs such as violations and the behaviors of financial statement restatement,we can find that many internal control weaknesses exist in lots of listed companies to a certain extent,which will lead to serious economic consequences such as influencing the reliability of financial reporting and increasing the difficulty of financing.So the remediation of internal control deficiency is important and essential.It is known that it is the management’s duty to rectify the internal control weakness,so whether the management will amend it depends on the severity of internal control weakness,the willingness of management and external pressure and so on.And corporate governance,as a mechanism,will affect the decision-making and behavior of management.In light of that,this paper chooses the listed companies in Shanghai and Shenzhen A shares on the main board disclosing internal control deficiencies in 2012 and in 2013 as sample,observing if these companies remedy the deficiencies in the next year,and empirically test the effect of three aspects of corporation governance including the characteristic of the Board,the audit committee and equity structure on the remediation of internal control weakness.The research result show that:firstly, in the characteristics of board of directors,the effect of the scale, independence and diligence of the board of directors on the remediation of internal control defects is not significant.Because the independent directors in Chinese companies are mostly set in accordance with the minimum number to meet the requirements of the form,and have the phenomenon of "honor" and "vase", which can not play a substantive role.In addition,the high frequency of meeting of the board of directors,on the one hand means to solve the existed problems,on the other hand means that there may be new questions,so its effect on the remediation of internal control can not be generalized.The effect of separation of the chairman and the top manager on the remediation of internal control weakness is significant, indicating that the separation of the two limits the power of management,and helps to strengthen the supervision of the management.Secondly,in thecharacteristics of audit committee,the positive correlation between the size of audit committee and the remediation of internal control defects indicates that audit committees fulfill the correspondent duties,playing an important role in the remediation of internal control deficiencies and its improvement.Thirdly,in the characteristics of the ownership,the relationship between managerial ownership and the remediation of internal control weakness is not significant.Because the share proportion of management in the listed companies which have internal control weakness is low, and some companies’ management even do not have ownership, so shareholdings incentives can not take effect. The positive relationship between share proportion of institutional investors and the largest shareholder and the remediation of internal control weakness is significant,indicating that the institutional investors are taking an active part in the company’s strategy and decision-making affairs,and the large shareholders plays an important role in supervising the decision-making and other behaviors of the management.The main implications of this research are:Firstly,to mobilize the enthusiasm of the management,making which play subjective role in the remediation of internal control weaknesses through stock-based compensation and assessing management based on the quality of internal control;Secondly,to optimize the system of audit committee within listed companies and strengthen relevant information disclosure;Thirdly,to encourage institutional investors to participate in corporate governance,and encourage institutional investors to increase the shareholding ratio and long-term investment, so as to have the ability and motivation to supervise the managers;Fourthly,to improve relative laws and regulations of internal control,enhancing the cost of internal control deficiencies to limit the randomness of the management in the recognition and remediation of internal control weaknesses.Researching the effect of corporation governance on the remediation of internal control weakness, this paper makes contributions in two aspects: Firstly, this paper focuses the angle of view on the subsequent remediation of internal control weaknesses instead of researching the disclosure of internal control weaknesses.The present researches on internal control mainly concentrate on the factories influencing the disclosure of internal control weaknesses and its economic consequences,and this paper can enrich the existing literature on internal control weaknesses and broaden the research perspective.Secondly,exploring the differences of the behaviors of listed companies’ remediation of internal control deficiencies from the view of corporationgovernance,this paper provides microscopic evidences and supplement the relationship between corporation and internal control.