Study On The Internal Control Deficiency, Corporate Value And The Debt Capital Cost

In January 2008, the Societe Generale lost ＄7.14 billion for one internal trader buying and selling European stock index futures illegally. This figure has gone far beyond the Bahrain bank failures in 1995. In the same year in July, the Bank regulators in France-the French Banking Commission was on a fines of Societe Generale up to 4 million Euros. Reason is because of the serious lack of internal control mechanism, directly led to the huge trading fraud from happening. According to Bloomberg, a senior analyst of International financial research firm Celent, Axel Pierron thought that" Although adopt the complex risk management measures, banking industry is still faced with the risk:The employees who are familiar with company internal risk control process might circumvent these processes, and to cover (investment) losses". After the scandal, although the bank’s board members drew up a 69-page report, reflects on the problems of Societe Generale’s internal management, but after resumption of trading, the price of its stock still plunged more than 6%, and its share price has fallen by 20% since 2008. So, internal control defects will bring irreparable loss to enterprises.Internal control has played an important role on ensure the authenticity and reliability of accounting information, protect the lawful rights and interests of investors and the effective operation of capital market. But at the same time, massive fraud cases occur frequently, let the shareholders and other stakeholders aware of that, defects in the internal control system, not only failed to help enterprises avoid maximum bounded rationality and opportunism tendency, but also can lead to paralysis, bring fatal blow.Since the turn of the century the Chinese government has gradually expand the building work of the system of internal control. In June 2001, the ministry of finance issued the "internal accounting control criteria-basic specification (try out)", opened the prelude of the construction of the internal control system. And then by five ministries jointly issued the "enterprise internal control application guide", "enterprise internal control evaluation guidelines" and "enterprise internal control audit guidelines" indicates the system has been basically completed. At present, internal control has been widely used and developed in the listed companies in our country, Compared with the COSO internal control objectives, it joined the characteristics of our country, such as asset security, and promote the enterprise strategic target realization. But at the same time, it also faces many problems, such as internal control information disclosure lack of substance, internal control evaluation lack of standards and tools, these can both cause internal control defects. As external constraint mechanism introduce continuously and the embarrassing situation of the internal control construction made us realize that the lack of the theoretical system and institutional environment incommensurate will affect its role in internal control, and even cause serious consequences. In view of this, in this paper, the internal control defects and its effects are studied.In this paper, the internal control defects as the main line, which is divided into seven chapters. The first chapter introduction, mainly describes the article’s research background, significance, content and method, And defines the key concepts involved in the article and its extension, and puts forward the research problem. The second chapter is literature review, the literature concerned with the internal control defects, from the characteristics of the internal control defects and the market value of listed companies and the influence of the debt capital cost are reviewed, further deepen the research content. In the third chapter, the system background and theory is introduced, to review the two instead control defect management system development, mainly reviews the internal control defect management system development of China and the United States, find out the problems of internal control defects governance in our country, and put forward the place in the aspect of internal control laws and regulations formulated that still need to be further perfected in our country. The fourth chapter mainly analyzed the cause of the internal control defects, to enable listed companies to control risk more targeted and enables the auditor do the internal audit more efficiently, and saving the audit cost.The fifth chapter, sixth chapter mainly to do a empirical test on the internal control defects affect market value and cost of debt capital, then the listed companies which have internal control defects will be divided into two groups, the first issue the internal control self-evaluation report, the other not, to detect that issue the internal control self-assessment report whether can impact the market value and the cost of debt capital of listed companies. Further, The two chapters will also divided these companies which issue the internal control self-assessment report into two groups by Whether the internal control audit report were issued at the same time, to detect whether issue the audit report will further enhance the enterprise market value, reduce the cost of capital. Chapter seven is the summary of the full text, and the insufficient and future research direction is put forward here.This article concluded that, such as the company scale, corporate governance structure, the key financial ratios, Whether through mergers and reorganization in the near future, change of certified public accountants, whether there are too many subsidiaries, whether foreign trade is frequently will form the internal control defects. As a result, the listed company should establish a good system of independent directors and audit committee system, to formulate reasonable incentive policy, and to establish a continuous knowledge assessment mechanism, to strengthen the follow-up education. To pay attention to the risk of the enterprise’s financial data, especially profit data, capital structure, solvency and liquidity ratio data. Pay more attention to the internal control risk of merger and reorganization, encourage enterprises listed overseas, Reduce frequency of the replacement of the accounting firm for no reason.The existence of the internal control defects can reduce the market value of listed companies, and increase its cost of debt. For the company which has internal control defects, issued by the self-assessment report of internal control and audit report will not significantly increase its market value, but can significantly reduce the cost of debt capital. This is because a small percentage of the self-assessment report and auditing report exist distortion phenomenon, compare with the small and medium shareholders, the creditors has the high degree of information symmetry, they easier to identify the authenticity of internal control information, So, to disclose internal control information is easier to influence the cost of debt.This paper argues that should further standardize information disclosure of internal control system, mandatory disclosure of internal control information, establish responsibility mechanism, with particular emphasis on the chairman, general manager and chief financial officer of corresponding responsibility, including criminal responsibility and civil liability, increase the illegal cost. And actively establish a certified public accountant information system and the credit archives, in order to reduce violations of certified public accountants. The government should enact "internal control tool to guide" as soon as possible, standardize the content of internal control disclosure information detailedly, to cultivate the talent of internal control evaluation, make our country internal control evaluation information more authenticity, normative and decision-making reference.