Research On Internal Control Quality Evaluation And Its Early-warning Function To Financial Fraud

Since the21st century, Enron, Xerox as the representative of the financialfraud happened frequently and seriously affected the investor’s confidenc e in capitalmarkets. and the best measure of reduce financial fraud and financial loss that causedby financial fraud is early prevention. Internal control as the indispensable key part o fearly prevention has became the focus of attention of enterprise. Through theoptimization and the improvement of internal control, enterprise can prevent theoccurrence of financial fraud and guarantee the assets safety and sustainabledevelopment of the enterprise. Whether or not the internal control can warn thefinancial fraud in reality needs to be verified.On the basis of reviewing researches from domestic and overseas, this paperanalyzed the early warning mechanism of internal control to financia l fraud firstly,and then we researched the data of2008-2012, and selected some companies as thestudy sample. These A-share listed companies of Shenzhen Stock Exchange werepunished by Securities Regulatory Commission, Stock Exchange and the Ministry ofFinance and one financial fraud company have chosen one non-financial fraudcompany to match. We established the Evaluation System of Enterprise InternalControl Quality on the basis of five elements of internal control, and evaluated thesample company internal control quality by using entropy method. At the same time,this paper studied the early warning function of internal control to financial fraud byusing support vector mechanism. The result indicated that the previous year internalcontrol quality has a very good early warning effect to financial fraud.In order to fully develop the early warning function of internal control tofinancial fraud, this paper proposed that we should improve the internal controlsystem by using internal construction and external monitoring. On the one hand,Chinese enterprises should improve the internal control environment, and establish asound internal supervision and feedback system; on the other hand, regulators shouldcontinue to push forward the construction of the internal control system and increasethe quality of internal control of listed company supervision.