Research On Internal Control And Management Agency Problem

Principal-agency relationship is "a person or persons (the principal) entrusted to other people (agents) according to the client's interests to engage in certain activities, and the corresponding decision-making power granted to agents of some contractual relationship" (Jensen & Mecling,1976). In the condition that ownership separate from the control, this agency relationship will be formed between shareholders and gonvernor. Because of information asymmetry and incompleteness of contracts, this will cause a management agency problems in this principal-agency relationship (Hart,1995), such as job neglegence, management fraud, non-efficient investments, occupation of the interests of shareholders, etc. To solve the management agency problem, no cost will achieve no gains. In this case, we need to establish effective corporate governance structure, including internal controls. Large number of facts reflects that the effective internal control would inhibit management agency problems, and the internal control failure will exacerbate management agency problem. However, the existing literature lacks systematic research on the point that how the internal control affects the management agency problem.This paper reviews the international research results systematically, applies to principal-agency theory, property rights theory, contract theory and the internal control theory synthetically, and with the research methods of normative analysis, contract analysis, empirical analysis, taking China's listed companies as research sample, and has a comprehensive and in-depth research on the internal control, which is how it affects management agency problem. Firstly, it discusses the boundaries of internal control, relationship between internal control and related concepts, internal control evaluation system and other infrastructure issues, focusing on the establishment of evaluation index system of internal control under the level of corporate governance. Secondly, it discusses how the management agency problem conducts, analyzes theoretically how the internal control affects the management agency problem, establishes corresponding theoretical model. Thirdly, taking our 2005-2010 Shanghai and Shenzhen listed companies empirical data as study sample, in aspects of agency costs and management fraud, empirically analyze how internal control affects management agency problems. Finally, linking theory with practice, based on the theoretical and empirical research, focusing on internal control of corporate governance, this article explores system arrangement on how to govern management agency problems.This paper reaches the following main conclusions and perspectives under long-term study:(1) the marginal means internal control within the control range. It expands with the development of internal control practices. From the current practice of internal control, internal control boundary can be summarized as the enterprise's internal activities, which includes not only financial control, asset control, personnel control, information control, but also investment and financing control, procurement control, sales control, production operations control. Compared with other management, internal controls leans towards how to distinguish responsibility and authority of the each control part in internal activities, and how to prevent and control risks. (2) As the main impact to the internal control of management agency problem of mainly mainly comes from the internal control of corporate governance level, it establishes the internal control evaluation index system composed of the ownership structure of supervisors, board of directors system, management incentive compensation system control, maintenance and financial reporting control. (3) It analyzes theoretically how the internal control affects the management agency problem in perspective of incompleteness contract, and establishes corresponding theoretical model that internal control is a control mechanism which can solve the problem of management agency problem, which can be regarded as a re-negotiation mechanism. (4) With empirical study of the impacts to the management agency problem arises from the internal control, the results show that the internal control have a certain impact on management agency problems. (5) Linking theory with practice, in perspective of internal control of the corporate governance level, it brings forward a set of institutional arrangements to solve management agency problem, including improving enterprises control arrangement systems, internal control evaluation and disclosure system. These findings is revealing, which further deepens theory research on the internal control and management agency problem, and guides enterprises to further improve our internal controls, inhibits manager-agent problem.