Corporate Governance Effect After The Disclosure Of Material Weakness

Corporate Governance and Internal Control became the focus of academic research since the repeated eruption of financial crisis and company fraud. From isolated to "large internal control theory", from "environmental" to "confluction", the combination of corporate governance and internal control becomes research trend. In China, the company governance action required enterprises with material weakness to publish a rectification report began in 2007. "Implementation Guidelines For Enterprise Internal Control" required the publishment of managers' self-evaluation report and the auditors'verification report of the validity of internal control was enacted in 2010. This article investigates economic consequences of disclosure of material weakness from the perspective of the corporate governance.This paper's work mainly reflects in the two following except difiniting some basic concepts and reviewing some classical theories and literatures.The first aspect, with listed companies exposed material weakness in 2006-2007 as a sample, using "T test of matching sample method", The inspection of the improvement of management behavior investigate the improvement of corporate governance in five years. Research shows that:after the disclosure of material weakness, (1) The equity structure of sample company has been improved, and the ratio of share concentration drops dramatically. (2) The board structure becomes more reasonable and functional since the drop in the size and the increase in the frequency of meeting. (3) Independent director system performs not ideal. The construction of the system of independent directors in listed company still stays in legal--complianced stage, Although the independent directors play a expected role as a force power to disclose the material weakness.The second aspect, with listed companies expose material weakness in 2007 as a sample. First, we score the validity of sample companies in 2006-2010 by "factor analysis method", the reasults show that:(1) The validity of sample company increases year by year. (2) The polarization trend is obvious, which means part of good companies has turned from " passiveness " to "autonomy". (3) The gap of the increase of validity is narrowed year by year. There was a leap in 2007, and a drop in 2008 and 2009 owing to the influence of financial crisis, then a rebound in 2010. Second, we use SPSS 17.0 to do the linear regression between the improvement of management behavior and the score of validity. The results show that:(1) The increase of separation degree between chairman and CEO promotes the improvement of the validity effectively. (2) Related to the other framework structures, the size of the board contributes little to the improvement of validity, although it inclines to better. (3)The drop of share concentration ratio promotes the increase of the validity significantly, while the drop of ownership balance ratio owing to "equity division reform" and the expansion of scale of investors goes against further improvement of the validity of internal control.The innovation of this paper mainly reflects in the two followings:1. This paper analyze the positive effects of exposure of material weakness from the perspective of corporate governance for the first time, investigating how much the improvement of administrative behavior contributes to the improvement of the validity of internal control.2. This paper structures a comprehensive evaluate system of the effectiveness of internal control according to "risk-based method", and divide the enterprise strategic target into two levels:survival development goals and social objectives, the former could be measured by the ability of market,profitability and innovation.