Research On Quality And Economic Consequences Of Internal Control Self-assessment Report

At the beginning of 21 st century, America out broke several financial scandals, such as Enron Corp., World Com Corp. which shocked the whole country and the world. Especially they went bankrupt soon. At the same time, investors who suffered lots of losses doubted why the corporations were so fragile. The regulators thought deeply the shortcomings in the inner corporation government and external regulation. To redeem the investors’ confidence, America parliament promulgated well-known SOX Act. According to the act, the public corps would be regulated more strictly. The provision 302 and 404 require the corps should assess the effectiveness of internal control and report to the public the material weakness in the internal control, and the report should be assured by CPA. China promulgated The Basic Standard for Enterprise Internal Control in 2008 which was called China SOX Act.Internal control objectives include the reliability of financial reporting, operating efficiency, and legal compliance. The train of thought of the regulators is: the effective internal control can improve the quality of financial reporting, reduce business losses; enterprises can find vulnerabilities and correct it through the internal control assessment, and investors can judge the quality of the financial report through the internal control information. The internal control information has become important non-financial information outside of the accounting information. The disclosure of information need to spend high cost and the cost of the final undertakers are the investors. For investors and regulators, the implementing effect of the Act is very necessary. Since SOX act, studies on motivation and economic consequences of internal control information disclosure are very rich in American. The studies on the economic consequences can help regulators to understand the act enforcement effect and whether the act is in accordance with the principle of cost and benefit. Therefore, this paper researches information disclosure quality and the economic consequences of internal control of China’s listing Corporation by systematically teasing relevant research at home and abroad, combining with the institutional background, and environmental information disclosure of China. I hope the study can provides empirical evidence to further enhance the transparency of information in our country.Choosing internal control self-assessment report disclosed by firms in mainboard of Shenzhen Stock Exchange from 2009 to 2011 as samples,after reading reports one by one and statistical analysis, I find that the proportion of listing corporation disclosure of internal control deficiencies are very low, almost no material weakness, which is much lower compared with the developed country. The ratio reached 16.9% in USA, Japan 2.1%, and our country is less than 1%. The contents and expression of disclosure of many companies are vague, not clear which reduce the usefulness of assessment reports. According to the above situation, this paper does not use the international practice research-- taking the weakness of internal control as the research object, or the domestic researches. The paper formulates quality standards and norms for self-assessment report of internal control, and quantifies the norms based on entropy model, resulting in internal control quality index, correlation index and reliability index. Descriptive statistics show the disclosure quality index is rising year by year. Then the paper examines the relationship between index and earnings quality, the cost of equity capital, stock market information efficiency by the multiple regression analysis. The results show that, the higher the quality of self-assessment report of internal control, discretionary accruals, earnings aggressiveness, earnings smoothness is lower, but there is no evidence of significant correlation between it and real earnings management activities. The higher the quality of information disclosure of internal control, the capital cost is lower, especially for the unprofitable enterprises. The higher the quality of information disclosure of internal control, stock price synchronicity is lower. The results show that, the voluntary disclosure of internal control self-assessment report, to a certain extent, reduce the information asymmetry; self-assessment reports has certain information content.This paper is divided into eight chapters.The first chapter is an introduction, including: research background, research significance, research content and research framework and innovation.The second chapter is literature review. I find the research direction and the starting point of this article on the basis of reviewing foreign study on internal control deficiencies disclosure motivation, influencing factors, the economic consequences and domestic empirical study of internal control in recent years.The third chapter is the system background and theoretical basis. It analyzes China’s regulatory process of internal control information disclosure, introduces environmental characteristics of listing Corporation in China, and signaling theory, impression management theory, economic consequence view and selective information disclosure of internal control, self-assessment report status of listing Corporation in China.The fourth chapter is construction of internal control self-assessment disclosure quality index based on entropy model. The index synthesis of an integrated index by using the entropy model is convenient for comparison between enterprises, and lay the foundation for the empirical study.The fifth chapter is a study on the relationship between self-assessment disclosure quality and earnings quality. This chapter examines the self-assessment disclosure quality index and accruals, real activities earnings management, earnings smoothness to verify whether the correlation is significant between high quality of internal control information and high quality of earnings information.The sixth chapter is a study on the relationship between self-assessment disclosure quality and cost of equity capital. This chapter examines the quality of internal control information disclosure would significantly reduce the company’s cost of equity capital.The seventh chapter is a study on the relationship between self-assessment disclosure quality and information efficiency of stock market. This chapter examines the quality of internal control information disclosure would significantly reduce the company’s stock price synchronicity.The eighth chapter is the summary of the whole paper. It includes the conclusion of the study, the policy suggestion for supervision department, research limitations, and further researches.The innovation of this study have the following three aspects:(1) It analyzes the status and existing problems of internal control information disclosure in China using self-assessment report as the main research object. Previous studies abroad concentrate on material weakness of internal control. This paper gives a comprehensive study on the contents and form of self-assessment report of internal control.(2) It quantitative and assesses disclosure quality for self-assessment report of internal control by using entropy model. We refer to the accounting information quality standards in quality assessment, and take into account the information usefulness to the report user decision. Advantages to quantify the disclosure quality are not only for the contrast among enterprises, but also conducive to the development and deepening of empirical study.(3) It systematically studies the economic consequences of internal control information disclosure. Previous studies are focused on the quality of accounting information and the economic consequences. Self-assessment report of internal control is the non-accounting information, and the important supplement to accounting information. This paper systematically researches on internal control information quality and economic consequences, which expands the study on decision usefulness of non-financial report.