Research Concerning The Influence Firm Characteristics And Director Backgrounds On Identification Standards Of Internal Control Deficiencies

The construction of internal control in our country,strongly driven by “the basic norms”(2008),has entered into a new stage namely “standardization,comprehension and regulation”.After years of continuous efforts,the problem whether internal control “exists or not” has been solved.Nextly,much attention should be paid to its “validity”.The evaluation of internal control aims to confirm its effectiveness.An important basis for determining the effectiveness of internal control is deficiencies identification.Mainly originated from the uncertainty of environment,self-interest and bounded rationality of human nature,etc.,the deficiencies of internal control are the loopholes,weaknesses and deviation which exist in the design and operation stage and can reduce the possibility of goals' realization.To make the identification more scientific and reasonable,as well as to make the deficiencies more accurate and reliable,approved by recognized agenc y,an enterprise negotiates to formulate a normative document about the identification of deficienc ies,namely the Identification Standards of Internal Control Deficiencies(ISICD).ISICD uniforms common and repeated concepts and judgments in the process of identification.However,regulations promulgated by domestic and foreign authorities haven't made more detailed instructions.Also,academic circles haven't systematically explored how an enterprise chooses its ISICD.Domestic and foreign literatures related to internal control deficiencies are reviewed in this dissertation.Meanwhile,this dissertation gives an analysis on various reasons for the motivation to supply ISICD,using “principal-agent theory” to solve the problem “why supply ISICD”,using “signaling theory” to solve the problem “why supply strict ISICD”,using“impression management theory” and “third-person-effect theory” to solve the problem “why supply loose ISIC D”.Four basic theories are used mainly to solve the proposition “why” and are unable to better solve the proposition “what”,“how” and “who”.It is practical to use integrated systematic methodology to trace the origin of ISIC D.Reviewing the evolution of enterprises internal co ntrol in our country,focusing on the situation of different degree s of ISICD strictness in listed companies,on the basis of four theories mentioned above,referring to the WSR methodology,this dissertation analyzes the mechanism of “ISICD choice”.Following the logic of “natural law”-“operation rules”-“code of conduct”,this methodology solves many complex systematic problem,acquiring outstanding performance and good reputation.It is suggested that,on one hand,in combination with characteristics of firms themselves,ISICD is formulated after reaching a negotiated consensus,which follows the way of “rules-oriented based on the guidance of principles”.This results from the “natural law” and “operation rules” of ISICD and is what“W”(“Wuli”)and “S”(“Shili”)refer to.As a main signal one firm different from other firms,its characteristics are related to the choice of ISICD;on the other hand,ISIC D is finally approved by directors and presents their management concepts and philosophies,value orientations and other psychological traits.This results from the “operation rules” and “code of conduct” of ISIC D and is what “S”(“Shili”)and “R”(“Renli”)refer to.Director backgrounds,as the predictors of psychological traits,are associated with the choice of ISICD.According to the mechanism of “ISICD choice”,this dissertation puts forward several hypotheses.Designed to test the hypotheses mentioned above,this dissertation uses a sample of C hinese A-shared non-financial listed companies during the year 2010 to 2014,uses quantitative standards of financial report for determining significant internal control weakness to create “ISICD Index”,builds two-way fixed-effects model to empirically study the influence of firm characteristics(such as size and industry)on ISICD choice,further analyzing the influence of industrial character on ISICD choice between state-owned and non-state-owned companies,et.al,as well as,the influence of directors backgrounds(such as age and position)on ISICD choice,further analyzing the influence of age background on ISICD choice between quick and slow companies' regional maketing process,the influence of directors' function on ISICD choice and the moderate effect of time using ISICD,the influence of key-position directors' turnover on ISICD choice,et al..Main conclusions and enlightenments of empirical research are listed as follows:Firstly,firms' size and industry characters,et al.,significantly influence the choice of ISICD.In addition,compared with state-owned companies,in non-state-owned companies,the influence of industry characters on ISICD choice is more significant.It is suggested that the choice of ISICD returns to companies' fundamentals.Enterprises are encouraged to design their internal control system in accordance with their own characteristics(besides“compulsory actions”,increase “voluntary actions” appropriately).Also,operational guidelines for internal control evaluation should be elaborated to have certain pertinence and flexibility under the premise of its rigor and scientific style.Secondly,to be a predicator of management concepts and philosophies,value orientations and other psychological traits,director backgrounds function as regressive or “soft” factors in the choice of ISICD.Directors' age and position background,et al.,significantly influence the choice of ISICD.Moreover,compared with areas of slow marketing process,in areas of quick marketing process,the influence of directors' age background on ISICD choice is more significant;the influence of directors' function on ISICD choice is significant,and compared with their consulting function,their supervising function is more influential on the choice of ISICD;compared with samples using ISIC D previously,in samples using ISICD subsequently,the influence of directors' functions on ISICD choice is more significant;the influence of key-position turnover on ISICD choice is significant.It is suggested that besides companies' internal-necessities,the choice of ISICD embeds in personal self-awareness.Enterprises should be committed to creating a culture of benign and pay attention to the selection,employment,cultivation and reservation of their management personnel.Also,enterprises should coordinate the construction of “hardware” and “software” and let the requirements become the habit of all personnel.