The Identification Of The Failure Of Internal Control Over Financial Reporting Based On Logit Model

Enron, Worldcom and so many other renowned international companies went bankrupt because of financial scandal from the early21st century. It brings some significant negative effects on the global economy and the health of the capital market operation. To recover the investors’ confidence in the capital market, the congress of the United States promulgated the sarbanes-oxley act in2002.The evaluation and audit of "internal control over financial reporting" which ruled in this law becomes the focus of the society. Various countries accelerate their own internal control system construction by referencing for the practice of the United States. Our country also made unremitting efforts on the formulation and implementation of internal control policy. Five ministries and commissions released the "enterprise internal control basic norms" in June2008and released supporting guidance in April2010, which established the system of evaluating the effectiveness of enterprise internal control and auditing the internal control over financial reporting. It means that chinese listed companies accept the audit of internal control over financial reporting has become a foregone conclusion. One of the core elements of the audit of internal control over financial reporting is to identify whether the internal control over financial reporting is effective or not. But there are few research of this aspect at home and abroad at present. This paper’s perspective based on the internal control over financial reporting can reasonable assurance the information quality of financial report. The empirical research is to use financial index to characterize the effectiveness of internal control financial reporting.This paper used the US-listed Chinese companies in2009to2011as the training sample and combined with the literature’s theory analysis of relation between internal control over financial reporting and the quality of accounting information at home and abroad. Constructing the Logit model to identify the failure of internal control over financial reporting. First of all, to select the financial index significance test and multicollinearity test. Secondly, the index will be selected for Logistic regression analysis. Finally, we get Logit model and carry on the point of division determine. The test of Logit model recognition ability based on the US-listed Chinese companies in2008as testing samples.On the basis of the above research, this paper draw the following conclusions:(1) The companies which internal control over financial reporting failure and companies which internal control over financial reporting effective have an significant difference between their financial index. The financial report shows that internal control failure will ultimately affect the quality of accounting information, cause the the anomaly of financial index.(2) Using the auditing opinions category of internal control over financial reporting to divide the sample, then building Logit model of recognition of internal control over financial reporting failure, which through all kinds of tests and has good goodness of fit. When0.5as the point of division for recognition model, for the training sample, the accuracy is69.3%in the companies which have failure internal control over financial reporting, the recognition accuracy is73.3%in the companies which have effective internal control over financial reporting,the training sample overall recognition accuracy can reach71.3%. For test sample, the correct recognition rate is71.9%of companies which have failure internal control over financial reporting, the correct recognition rate is70.5%of companies which have effective internal control over financial reporting, the test sample overall recognition accuracy is70.7%. The model has good recognition accuracy and can be effectively applied to the recognition of internal control over financial reporting failure in listed company.Finally, this paper puts forward the the suggestion about the application of the model of internal control over financial reporting failure’s recognition for certified public accountants, supervision departments, enterprises and investors. Hoping to provide value for the evaluation and audit of internal control over financial reporting as well as the further development of internal control over financial reporting of listed companies in our country.