Research And Verify The Effectiveness Of Internal Control In China’s Listed Company

As financial fraud scandals of Enron, WorldCom and other well-known companies have been exposed, and these companies have been bankrupt, the listed company’s internal control attracts more and more regulators’ attention. In July2002, the U.S. Congress passed the "Sarbanes-Oxley Act". The Act emphasizes the responsibility of the company’s management to establish internal control system and the corresponding control program and insure that they are adequate effective. The Act requires the company’s management should disclose the internal control evaluation reporting over financial reporting together with the financial reporting, and should also disclose the audit opinion on the internal control evaluation reporting from the external auditors who is in charge of auditing the company’s periodic financial reporting. While in China, the treasury and other correlative departments published "Enterprise Internal Control Basic Standard" and "Enterprise Internal Control Guidelines" in2008and2010respectively. The "Enterprise Internal Control Basic Standard" and related guidelines require listed companies to evaluate the effectiveness of the internal control of the Company and disclose the internal control self-assessment reporting. And they also require the listed companies in the main board market of Shenzhen Stock Exchange and Shanghai Stock Exchange to hire an accounting firm to audit the effectiveness of the internal control and issue an audit report from January1,2012.The promulgation of these rules and regulations fully reflects the function of internal control in improving corporate management, improving the quality of information and helping investors make decisions has been recognized. But during the theoretical study for the verification of the effectiveness of internal control, scholars all study in the field of the effectiveness of design of internal control or the field of the effectiveness of execution of internal control, and rarely evaluate and verify the effectiveness of internal control from the target of internal control, that is to say to verify whether the execution of internal control could achieve its goals at the end. This paper begins with the expounding on the theory of the internal control targets and verifies whether the establishment and execution of internal control could achieve its goals by selecting two internal control targets, ensuring the reliability of financial reporting and improving the business efficiency of companies, as the contents that we will verify. For verifying the two goals, this paper uses multiple linear regression analysis and a two-stage model which involves methods of Data Envelopment Analysis and Tobit regression model respectively. At last, we get the conclusions:the higher the level of internal control of company is, the higher the reliability of financial reporting is, and the better business efficiency of company is. In other words, the establishment and improvement of the internal control of companies did contribute to the realization of its goals. So, we can verify the effectiveness of internal control, which provides empirical evidence for the internal control policies and regulations as well as internal control relevant research.