Government Audit,Internal Control And Executive Corruption

Executive corruption is not only an extreme expression of agency problem,but also a distinct example of the infiltration of corruption from governmental bureaucracy into enterprises.Compared with official corruption,executive corruption contains more contents because executives are in direct charge of corporate resources.Specifically,it contains explicit corruption such as embezzlement,bribe and insider trading,as well as implicit corruption such as wasteful perquisite.Especially,the executive corruption in SOEs hurts no less than official corruption considering the institutional background of China with public ownership and sector remaining dominant.For instance,it not only directly constitutes agency cost and impairs enterprise value,but also harms the interests of all public,tarnishes the image of SOEs,endangers the legitimacy of public ownership,and concusses the ruling foundation of CPC.Therefore,it constitutes a major issue to curb executive corruption for the construction of the Party conduct and of an honest and clean government,the struggle against corruption and the reform of SOEs.To solve it,on the one hand,CPC and Chinese government have combated corruption with unprecedented strength,depth and extent,and reached a consensus that power should be exercised within the cage of regulations,and preliminarily built up the institutional system of anti-corruption with Chinese characters.On the other hand,anti-corruption with institutions shall be a complex and systematic career,where the whole institutional system work rather than single one institution.According to system theory,it is the mutual relationship among subsystems that determine the overall behavior of the system.Therefore,the feature of integration demands that the mutual relationship among subsystems shall be coordinated with the integrated principle.To sum up,in response to the reality of anti-corruption that single institution is just preliminarily built up and the relationship among institutions is waiting to be coordinated,academic researches take two responsibilities,one of which is to test the governance effect of single institution,the other one of which is to comb the theoretical relationship among institutions,so as to provide theoretical support for comprehensive governance.This thesis chooses to study on government audit and internal control as well as their relationship during anti-corruption.On the one hand,while people take it for granted that they play significant part in anti-corruption,yet academic researches lack all-sided empirical evidence on different kinds of corruption including both implicit and explicit corruption.Furthermore,it has been a black box about their governance mechanisms,which means there is little systematic theoretical elucidation or direct empirical evidence.On the other hand,considering they have respective advantages and disadvantages,so they need mutual complementation in reality.Nevertheless,the theoretical studies on their relationship are still in dispute.For instance,there are mutually exclusive points of"substitutional relationship" and "complementary relationship",in addition to which the point of "mediating effect" is also included.In the circumstances,what on earth is the relationship between government audit and internal control in the overall system of anti-corruption?How to coordinate the two so as to achieve comprehensive governance?If complementary relationship really exists,will it bring more governance effect?All these issues need to be clarified theoretically,so as to guide the development of the institutional system of anti-corruption.On that account,the subject of this thesis is to study on the governance mechanisms of government audit and internal control on executive corruption as well as their mutual relationship.For this purpose,based on the rationale of economics,politics,public administration and law,such as rent-seeking theory,agency theory,managerial power theory,power-control theory,immune system function theory and internal control theory,the thesis takes the use of both normative research methods and empirical research methods,following the technical route of topic posing,literature review,theoretical framework construction,empirical test and conclusion drawing.After the introduction,chapter two sorts out the development skeleton of relative literature from the views of the incentive and governance of executive corruption,government audit towards executive corruption,internal control towards executive corruption,and the mutual relationship between audit and internal control.Chapter three builds up a theoretical framework of comprehensive governance whose logical starting point is analysis of the fundamental cause of executive corruption,whose core is managerial power,and whose theoretical base are rent-seeking theory,agency theory,managerial power theory and power-control theory.Then it comes to the following three chapters,where the governance mechanisms are elucidated and the governance effects are empirical tested.The main findings are as follows.Firstly,it is generally testified that government audit indeed plays an effective part in curbing both implicit and explicit corruption.The governance mechanisms can be elucidated with two pathways.One is the reveal function of government audit,which empirically means the positive correlation between the corruption level before audit and the amount of money involving in illegal items revealed by audit.The other one refers to the defense function of government audit,which empirically means the negative correlation between the rectification of illegal items revealed by audit and the corruption level after audit.Further grouped tests find,which are subdivided by different types of executive corruption,that government audit works both on chief executive corruption and non-chief executive corruption and that it works on the corruption involved one person but not on the corruption that more than one person is involved.Another further grouped tests find,which are subdivided by different level of the intensity of audit supervision,that the more times audit is implemented and the better audit quality is,the more effective shows the governance effect.It also turns out that government audit can curb the corruption caused by managerial power when the variables of managerial power is applied into the models.In addition,the alternative explanation of executive remuneration is ruled out by the evidence that government audit exerts no direct influence on executive remuneration.But,government audit can strengthen the governance effect of executive remuneration by improving the overall governance environment.Secondly,internal control is also proved to be able to curb both implicit and explicit corruption,which empirically means the negative correlation between internal control quality and the corruption level,and also the positive correlation between internal control weakness and the corruption level.As for the remediation of internal control weakness,it turns out that comparing with the samples without remediation,the samples with remediation have lower level of implicit corruption but fail to have lower level of explicit corruption.Also,the more time before remediation,the higher level of corruption,i.e.the timely remediation of internal control weakness indeed helps to eliminate corruption.Further grouped tests find,which are subdivided by different types of executive corruption,that internal control works on non-chief executive corruption and the corruption involved one person but not on the corruption that more than one person is involved.As for chief executive corruption,internal control cannot merely play actual part of restraint,but hold the candle to the "devil".Generally,of course,it still turns out that internal control can curb the corruption caused by managerial power when the variables of managerial power is applied into the models.When subdividing the mechanisms by the five elements,it turns out that all work on implicit corruption except the element of Information&Communication,and that none works on explicit corruption but the element of Internal Environment.Thirdly,as for the mutual relationship between government audit and internal control,two kinds of empirical means are used.On the one hand,tests based on grouped regression shows whether the quality of internal control,government audit is always able to curb executive corruption.On the other hand,tests based on interaction term shows that the coefficient of interaction is a minus.Both support the assumption complementary relationship rather than substitutional relationship.Furthermore,tests on mediating effect draw a conclusion of denial,which rules out the assumption that complementary relationship is mixed with mediating effect.Further tests on the cumulative and incremental change of governance effects over time find that the complementary relationship helps to extend the governance effect on implicit corruption for about 3 years.Last but not least,the thesis puts forwards some policy proposals from the views of the improvement of the two themselves and their comprehensive governance by exploring the policy values.The anticipated innovation points are as follows.Firstly,unlike other literatures who focus only on single institution,this thesis tries to put government audit and internal control together in one analytical framework based on the view of comprehensive governance and hereby to build up the theoretical framework of their comprehensive governance on executive corruption by theoretically elucidating and empirically testing their complementary relationship or substitutional relationship,which make this thesis an integrated research.Secondly,current literatures focus on either explicit corruption or implicit corruption and all of them draw a positive conclusion.Relatively,this thesis studies on both the two and further subdivides executive corruption into chief executive corruption and non-chief executive corruption as well as the corruption involved one person and that more than one person is involved,so as to test the different governance effects towards them,finding the negative effect on chief executive corruption and the corruption that more than one person is involved,which adds to the knowledge of executive corruption and the governance effect.Lastly,unlike other literatures who still empirically measure government audit with dummy variables,this thesis achieves quantitative measurement by extracting indexes from the announcements of audit findings,hereby realizing more refined tests on the mechanisms of government audit.For the most part,current literatures empirically measure internal control with subjective indexes from the static perspective.Unlikely,this thesis expends relative research to the dynamic level of intertemporal tests by measuring the remediation of internal control weakness with dummy and continuous variables,which directly reveals the internal relationship between institutional improvement and anti-corruption,thereby enriching and deepening the knowledge on government audit and internal control.