Empirical Study On The Influence From Five Elements Of Internal Control On Company Financial Fraud

Internal control as the indispensable key components of an enterprise, has attracted much attention. Modern enterprises separation of ownership and management makes more groups take great expectations of enterprise internal control. They hope that through the optimization and improvement of it, enterprise internal control can depress the financial fraud, which can keep the assets of the enterprise safety and ensure the sustainable development.Based on the recent domestic and international financial fraud events, and with China’s internal control related laws and regulations have been introduced as the opportunity, this paper did research on the influence of financial fraud caused by the internal control of listed companies on the basis of the existing domestic and international study, and in view of the disadvantages of the current relevant research in the field,In order to make up for the deficiency of the research, according to basic standard for enterprise internal control and its supporting guidelines, and COSO internal control integrated framework, triangle fraud theory, combined with the present situation of internal control of Chinese listed companies, this paper have designed41internal control index based on the previous studies, and presents six research hypothesis:(1) Financial fraud and internal control quality are negatively correlated.(2) Financial fraud and corporate internal control environment are negatively correlated.(3) Financial fraud and risk assessment are negatively correlated.(4) Financial fraud and internal control activities are negatively correlated.(5) Financial fraud and internal control information and communication are negatively correlated.(6) Financial fraud and internal supervision are negatively correlated. Through descriptive statistics, contrast analysis and Logistic regression analysis model, this paper can draw the following conclusion:(1)The fraudulent companies and non fraudulent companies have discrepancy on the overall internal control and the five elements. The overall internal control and the five elements of non fraudulent companies have higher quality than those of fraudulent companies. The two groups of companies have obvious discrepancy in the overall internal control and the other four elements at the level of1%, except the internal supervision element.(2)The elements of listed company, such as internal control environment, risk assessment, information and communication, have obvious effect on the possibility of financial fraud at the level of1%.While the listed company has good environment on internal control, and risk assessment is accurate and timely, also, information and communication are timely and fully, financial fraud occurrence probability will be very low. The control activities have obvious effect on the possibility of financial fraud at the level of10%. While the control activities of listed companies are comprehensive and effective, financial fraud will be hardly occurred. Meanwhile, internal supervision is not a significantly factor of financial fraud.(3)The overall internal control has obvious effect on the possibility of financial fraud at the level of1%. The quality of overall internal control is of great significance on the prevention and suppression of financial fraud. While the overall internal control has high quality, financial fraud will be hardly occurred.(4)The fraudulent company often has a high asset-liability ratio, which is significantly higher at5%level, but the asset-liability ratio differences do not have a significant impact on financial fraud.Non fraudulent companies usually have a higher rate of return on total assets, which is significantly higher than that of the fraudulent company at1%levels, but also does not have an obvious effect on financial fraud.The main contributions of this paper are:(1)This paper have designed a internal control evaluation system for listed companies, not only designed41internal control indexes, but also develop the corresponding evaluation standard for each index, which can ensure the internal control evaluation work feasible. (2)In view of the existing evaluation index is not very comprehensive and the targeted is not strong, I take moderate expansion of the index system. So we can establish more reasonable and perfect internal control evaluation system.For some evaluation criteria is not reasonable, and some slightly subjective, based on the existing theory and data from practice, this paper did optimization processing.(3)This paper introduces two Logistic models and researches on the internal control and financial fraud internal relationship. Also, from the five major key elements of internal control perspective, this paper demonstrates the influence degree of each specific elements of the financial fraud. According to the different influence of each element of the index, this paper put forward the corresponding improvement suggestions.This research is insufficient because of subjective reasons as well as objective reasons.The influences caused by subjective reasons are:The author’s own theoretical basis and practical research capacity limits the accuracy and effectiveness of the results. Although this paper has designed41evaluation indexes of listed company to describe its internal control situation, but it still can not guarantee that these indicators can cover all aspects of the internal control, thus the explanatory power of the results has been weaken. Secondly, due to the partial evaluation for internal control of descriptive information extraction, and give0or1points, result in the subjectivity, and when changing the continuous variables into discrete variables there are artificially enlarged or reduced the difference between different companies’internal control.The objective causes make the inadequate research mainly includes:The study sample size is limited, it is difficult to avoid unauthentic small sample; the accuracy and completeness of the collection data may be effected by the internal control of information disclosure of listed companies to disclose information standardization and quality constraints. The sample size is limited, this paper is not divided industry research. The internal control of different sectors of companies may have different effects on financial fraud.