Research On The Relationship Between Quality Of Internal Control And Agency Costs

With the establishment of corporative enterprises, the gradual separation of ownership and management causes agency problems. The nature of the agency problems is asymmetric information, that the manager controls the company's full information, but the owner is in disadvantage of information. When the owners and managers are pursuing their own utility maximization, it can lead to moral hazard and adverse selection, also can damage the interests of the owner. Therefore, that how to guard against fraud and how to face financial and operational risks has been a necessary problems in the modern enterprise system which we have to face and solve.The client often take measures, including reporting systems (information disclosure), supervision, incentives (internal control) to control and supervise the agents, to solve the problem of asymmetric information. It is a general consensus that the internal control as an important part of the corporate governance system,it is playing an increasingly important role in the enterprise management. The internal Control and Corporate share a high degree of relevance (Xie Zhi hua, 2007). The internal control is the foundation of corporate governance, which needs internal controls to enhance its level.The establishment implement and improvement of internal control can be improve operational efficiency and prevent the occurrence of fraud,. Meanwhile,we can achieve the segregation of duties, improve the corporate governance mechanism, maximizing the achievement of organizational goals and so on, through a series of institutional arrangements, such as planning, division of labor, authority and approve.The disclosure of internal control information can provide additional information for users with external information. Because the internal control is the reasonable assurance for business efficiency, risk identification and prevention, and quality of financial reporting, external users can use the information to know whether the internal control system design is perfect or not; the executive is in place effective to determine the status of its management and financial reporting status. Additionally, the enterprises can not only do evaluate and independent audit by the opportunity of providing the control information, which can enhance their awareness of management's internal controls and improve their System's weakness, prevention and detection fraud promptly, so that it can make the level of management and the reliability of financial reporting better.; but also can effectively strengthen the internal and external supervision of activities, so that their behavior could be maximizing the interests of owners in principle, improve agent efficiency and reduce agency costs.In recent years, in order to promote the healthy-development and normal operation,to implement and improve internal control and protect the interests of investors, China has successively promulgated a series of policies, laws and regulations, which increased information-communication between the internal and the external to some extent, lowered the rate of asymmetric information, and also improved agent efficiency and reduced the agency costs. However, it's different from the west-countries which is in mature capital market, there are less analysis at perspective in empirical study of agency costs.In 2009, Shanghai Stock Exchange requires the companies that takes "basic norms of internal control" (Finance [2008] 7) to publish annual self-evaluation report, and engages accounting firm which have securities and futures business qualifications to evaluate the effectiveness of their internal control. This study is under the norms about relationship between internal control and agency costs at a new perspective of agency costs, which is divided into six parts, as follows:ChapterⅠ:Put forward the problems, and elaborate the significance by analyzing the reasons in failure on corporate governance. It also illustrates on the main ideas and methods,to construct the structural-framework.ChapterⅡ:Literature Review. This section mainly conducts a review and comment on the internal-control, agency costs and the relations between them from home and abroad, including the disclosure of internal control motivation, agency cost factors, internal control and corporate quality, internal control and agency costs. Moreover, it comments the effect on the basis of the internal control on agency costs. Chapter III:Theoretical Analysis. Firstly, it analyzes the meaning of internal control, the economic nature,the evolution of history, evaluation and reporting, and agency cost factors. Secondly, from the internal control and corporate governance, corporate governance and agency costs, monitoring and incentive mechanism and agency costs, Internal Control and Agency Costs is demonstrated.ChapterⅣ:Research Design. This chapter analyzes the definition and measurement on the internal control, agency costs and the associated control variables, propose hypotheses, and instructs the sample selection and data sources, model design,and the empirical results.ChapterⅤ:An Empirical Analysis. Descriptive statistics, correlation analysis, and regression analysis. Empirical data bases on the results of an empirical analysis.ChapterⅥ:Conclusions and Outlook. In the first place, summarizing the empirical results and policy recommendations. Furthermore, propose the design, the limitations on variable selection, and look into the future research directions.Through empirical research, we have the following conclusions:(1) Non-significant negative correlation between the quality of internal control and management expense ratio. The quality of internal controls promotion is not inhibited the dominant agency costs.(2) A significant positive correlation between the quality of internal control and asset utilization. High-quality of internal control is benefit for curbing agency costs.(3) Overall, the improvement of the quality of internal control could improve agent efficiency and reduce agency costs.In addition, with descriptive statistics, it can be found that the level of internal control of listed companies is generally low.There are a lot of difference among different kinds of industries, obviously, but also all of the companies are not at the same step.It's a bold attempt to study the relationship between internal control and agency costs through such a perspective of agency costs. Although we follow the evaluation of internal control which based on the results and don't take the process into account,it's be made a breakthrough in the Scope of the evaluation and methods. In this paper, founded on eight elements drawing on Coso's internal control reporting requirements and combined with the "basic norms of internal control" and the "Guidelines on Internal Control Evaluation" (Draft) which published by ministry of finance, it's be drafted five indicators,including the internal environment, risk identification and assessment, control activities, information and communication. And we divide them into 24 secondary indicators, which used to build a quality evaluation model of internal control to calculate internal control index.On the background of the empirical results, this article propose suggestions about strengthen publicity and promotion on internal control, improved internal control legislation, strengthen regulation of internal control disclosure and accelerated corporate' self- construction of the internal control in standardization and recommendations, and finally points out the limitations of the study and future research direction.