Investment In Internal Control Monitoring And Its Impact On The Cost Of Capital For Informatization Enterprises

Lots of frauds have provided evidence for the necessity of improving an effective internal control system from the viewpoint of both management and the independent auditor. To support and facilitate internal control system, the Committee of Sponsoring Organizations of the Treadway Commission(COSO) asserts that effective internal control monitoring(ICM) should enhance the efficiency of internal control system. The measures of internal control monitoring are important in improving management, perfecting information system, and reducing the probability of internal control weakness for the modern enterprise. In this dissertation, the main issues involve the optimization problem of internal control monitoring investment, and the influence of the investment in internal control monitoring on the cost of capital. The optimal investments and allocation models have been proposed base on the reliability theory, cost-benefit analysis, and the optimization theory. The main contributions of this dissertation are summarized as follows:First, a brief introduction is given on the classic domestic and overseas frameworks of internal control and internal control monitoring. The current studies on internal control and internal control monitoring are reviewed. Moreover, the research framework, investigation methods are presented. The concepts of reliability theory are also introduced.Second, this dissertation presents a distribution model that determines the optimal amount to invest in the internal control monitoring for modern enterprises. The reliability theory is utilized to measure the utility of the investment of internal control monitoring. An optimization model is built to maximize the utility of firm subject to a given level of investment desires by the management. It focuses on to the optimal allocation of investment to bring maximal utility to an enterprise.Third, based on cost-benefit principle, this dissertation investigates the optimal approach that a firm can make full use of limited resources investment in the internal control monitoring and achieve the maximum net benefit. Moreover, by referring to the concepts in law, we formulate the proposition that the investment in internal control monitoring will produce the deterrence effect, and thus the possibility of fraud will be reduced.Fourth, this dissertation examines the influence of the investment in internal control monitoring on the cost of capital. The investment in internal control monitoring can increase the reliability of the processes and improve the accuracy of the information. It will influence the firm’s assessed covariances with other firm’s cash flow which are made by the investors, and also the real decisions by managements. All of these will lead to the reduction of capital cost. Otherwise, the deterrence effect will reduce the possibility of fraud, which likely increases the expected future cash flow. Then the cost of capital will be reduced.The optimal models which have been proposed in this dissertation can be used to guide the investment strategy of internal control monitoring. These models accord with the cost-benefit principle, which contribute to improve the quality of internal control and reduce the investment in internal control at the same time. Furthermore, this dissertation theoretically proves that the increase of investment in internal control monitoring can reduce the cost of capital.