Research On The Material Weakness Disclosure In Internal Control Of Listed Banks

In 2006, the sub-prime crisis was erupted in the U.S., it has resulted in a significant impact on the global economy.In the current round of financial crisis, risk management of financial institutions has become the focus of attention. Listed banks have played an important role in safeguarding the country's financial security and stability, promoting sustained economic growth and rapid development, its internal control and risk management is the focus of attention. Caprio and Klingebiel's (2003) statistics show that since 1970, a total of 117 sub-systemic banking crisis and 51 non-systemic banking crisis was taken place in both developing and developed countries. Economic losses are caused in these crises by average of more than 10% of annual GDP, therefore, improving the efficiency of the banking system and maintaining the stability of the banking system are of great importance (Lei Chengyao,2007).Basel Banking Regulatory Commission said:good corporate governance of banks is not only a prerequisite for the effectiveness of banking supervision, but also to safeguard the banking system stability. But, if there is material weakness in the internal control system of the listed banks, its corporate governance and external regulation will be difficult to guarantee the effectiveness. What is the material weakness? How is the disclosure status of China's listed banks? These questions will help us to recognize the true state of its internal controls, evaluate its risks and the quality of the situation and then make the appropriate decision, In recent years, the shocking cases of fraud in listed banks, such as British Barings Bank, the France's Societe Generale Bank and China Agricultural Bank, without exception, related to its internal control system failure. But whether it is regulatory policy or related studies have focused on the internal control of the "deficiency" and the internal control of the "integrity, rationality and effectiveness", the failure to clearly put forward the concept of material weakness. In the financial crisis against the backdrop of the growing, research on the listed bank's internal controls, especially the material weakness in internal control has important theoretical and practical meaning.This paper is divided into five parts:ChapterⅠintroduces the research background and significance of the core concepts involved in this article, determines the content and structure of the arrangements.ChapterⅡdescribes the two parts from domestic and foreign policy guidelines as well as the results of previous studies. The first section of this chapter focuses on the foreign policies and regulations of the internal control, introduces the PCAOB on the definition of material weakness, then comments the literatures about factors affecting the disclosure of material weakness, the role of the disclosure of bank information and the costs and benefits of bank information disclosure. The second section of this chapter focuses on the domestic disclosure policy guidelines of internal control information, the status of material weakness disclosure, the role of information disclosure of listed banks and the nature of information disclosure.ChapterⅢanalyzes theoretical foundation of material weakness information disclosure of listed banks. Firstly, this paper analyzes the particularity of listed banks in corporate governance. Secondly, this chapter discusses the impact of the principal-agent theory, asymmetric information theory and financial regulatory institutions on the material weakness information disclosure of listed banks.ChapterⅣfirstly divides material weakness into nine types: Account-Specific, Training, Period-End Reporting/Accounting Policies, Revenue Recognition, Segregation of Duties, Account Reconciliation, Subsidiary-Specific, Senior Management and Technology Issues. Then, this chapter analyzes the listed-bank's disclosure status of its internal control with the case of China Minsheng Banking Co.ltd., and we have a further research on the material weakness of this bank's internal control.ChapterⅤintroduces the major conclusions, new points and some advice. We find that the disclosure, of internal control in the different part of financial reports is different, and there is no uniform appraisal criteria in the internal control self-appraisal report and internal control self-auditing report. The material weakness in the internal control is always related with the lack of responsibilities and training. This paper advised to improve the quality of disclosure of material weakness by the way of setting up the uniform standard, strengthening the supervising and so on.The innovative points in this paper are as following:Firstly, there is a systematic and comprehensive research on improving material weakness information disclosure of the domestic listed banks from a special perspective of banking regulation and governance. This paper argues that the interests of creditors to protect are the core issues in their corporate governance. In order to protect the interests of creditors,financial supervision sector involvement became inevitable. Information disclosure is the basis for effective regulation, but the material weakness information with a high degree of sensitivity and professionalism, will easily lead to misleading investors. Therefore, the listed banks in the disclosure of such information should pay particular attention to the border, the timing issues and so on. When necessary, listed banks can disclose such information directly to the financial regulator.Secondly, this paper initially constructs the conceptual framework of material weakness information disclosure of the domestic listed banks to help make up for the basic theoretical research in this field. It states that the concept of material weakness, objectives, meanings, standards, principals, methods, the frequency of disclosure, the report form, the main bodies of the disclosure and evaluation should be included in the conceptual framework.