Effectiveness Of Internal Control, Agency Cost And Auditor Choice

Internal control as an important governance mechanism of the company in recent years, the scholars began to pay attention to it. Financial fraud cases such as Enron and audit failure cases to put one thing on the agenda:How to protect the interests of investors in effect? America set up the institution of internal control in order to prevent risks, solve the agency problem, and protect the interests of investors thoroughly. The internal control fetch up the lack of external audit and the tow institutions make up double insurance to resolve the things which are mentioned in the above. In correspond, in 2008, Ministry of Finance promulgates the "basic norms of internal control", study for internal control has increased and internal control was paid much attention for its role. The system of companies'internal control whether can play an effective role in the key issue of corporate governance---agency problem or not? In the case of the formation of double insurance, the company how to combine the tow mechanism when it faces the connection between the external audit and internal control?This essay is on the basis of the research literatures which are about how to administer the agency costs. We select Shanghai-listed companies as our study sample and construct internal control evaluation index. Utilize these indexes; this paper examines the treatment effect of internal control and external audit about our country's listed companies. After comparing and analyzing the two institutions'functions, we base on the signaling theory to study influence the effectiveness internal control has made on agency problems to auditor choice according to the cost-effective principle.The empirical results show that internal control and external audit play a different pole in solving agency problem. In company, effective internal control can influence agency costs obviously, but external audit doesn't have this distinct function. Though this systematic theoretical analysis and comparison, this paper thinks that in twin insurance external audit has different roles with internal control. External audit can't resolve agency problems from the source .The effective internal control means the good result on agency problem. This result is information for managers and investors, the information hence influence the choice for auditors. Square up information costs, the effective internal control and information costs---audit fees influent the choice of Certified Public Accountants together. If one company has better effective internal control, it tends to engage small-scale Certified Public Accountants for the purpose of saving the costs of information transmission.