The Research On The Relationship Between Internal Control,Corporate Governance Structure And Financial Risks

In recent years, we witness the rapid development of the domestic capital market which has top the list of the emerging capital markets. With the quick development of the capital market, a number of listed companies were trapped in financial crisis, faced with special treatment by the SFC, or even forced to withdraw from the stock market. As the occurrence of the global financial crisis in2008, many large international groups went bankrupt overnight. As a result, financial risk prevention and control upgrades again into the focus of concerns. Both the change of external operational environment and the defects in internal management system, especially the defects in enterprise’ internal control and management structure, will lead to financial risks of the enterprise. Improving internal control and the enterprise management is the most direct and efficient approach to reduce financial risk for enterprises, which is significant to the development of the enterprise in the long run.Financial risk refers to the possibility of deviation between the enterprise’s financial status and planned target, which is affected by various unexpected factors beyond control. Internal control, a product of the development of the social economy, is an important guarantee to increase the efficiency of enterprise management, promote enterprise development, and build modern enterprise system. Corporate governance structure is the set of rules to regulate the relationship of shareholders and the management, with the primary function to define the relationship of the general meeting of shareholders, the board of directors and the management. The internal relation of internal control, corporate governance structure and financial risk can be known based on Principal-agent Theory, Property Right Theory and other theories. It is known that both the lack of internal control and the insufficiency in enterprise management will lead to higher financial risk.This paper starts with the internal control and corporate governance structure to discuss the effective measures to reduce financial risk, analyze the relationship of internal control, enterprise management and financial risk and to go deep in important factors based on the above background. This paper reached on the companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange during2009and2010. The research shows that the sound internal control system to regulate and restrict the enterprises’business management activities is an effective measure to protect the company from the risk; the policies of equity decentralization and restriction, the board of directors and the board of supervisors with appropriate scale, equity incentive and salary incentive etc. can significantly limit the financial risk significantly; and the nature of the controlling shareholders has no evident impact on the degree of financial risk. However, in cases study, the percentage of independent directors who are important to the company management does not show the restriction effect on financial risk, which indicates that independent directors does not play the expected roles and the management structure of domestic listed companies is still far away from the soundness.The objectives of this paper are to provide more targeting suggestions, improve the establishment and the execution of internal control system, optimize equity structure, enhance the checks and balances between shareholders, promote the participation of shareholders to company management, realize effective allocation to internal organizations and the personnel and to reinforce the implementation of incentive mechanism.