Research On Internal Control Appraisal Of China’s Commercial Banks Based On The Analytic Hierarchy Process

BACKGROUNDCommercial banks are increasingly essential in modern society. They have been playing the role of bridges and tunnels that transmit money in the economy. Commercial banks provide huge network so that capital can rapidly reach where it is in need, thereby enabling the great growth of economy. Because they are special enterprises that manage money and capital, they create credit and bear more risk than average. As a result, the crisis of commercial banks will bring huge disaster to world’s economy. Therefore, it is of great importance for commercial banks to enhance internal control as well as to strengthen the anti-risk capacity.However, there have been frequent incidents in banking industry since1990, accompanied by the rapid development of commercial banks. The latest one is the famous subprime crisis initiated by American banks. In this disaster, several banks announced bankruptcy, and this accordingly caused the instability of global economy. Basically, it can be seen that the main reason should be the lack of effective internal control. Instead of blaming the imperfect regulation system, it is considered to be the responsibility of inefficient execution. One of the solutions is to put more attention on evaluation of internal control. In other words, it is to manage the internal control system, so that its own weakness can be recognized and made up. In this way, most incidents can be effectively avoided. From this point of view, it is very important to conduct research on how to evaluate and manage internal control for commercial banks.OBJECTIVEBased on the views of The Basic Standards of Internal Control’ and ’The Guidelines of Enterprise Internal Control Evaluation’, this dissertation firstly aims at building an effective internal control evaluation system for commercial banks. It will employ analytic hierarchy process and fuzzy evaluation method to conduct quantified analysis, and to bring out straight-forward results. Another objective of this dissertation is to analyze the case of ICBC through the evaluation system mentioned above. The purpose is to discover the advantages and disadvantages of this system, which will be beneficiary in improving it. It will also contribute in increasing the global competitive power of China’s banking industry.MAIN CONTENT AND VIEWChapter one introduces the background and structure of this dissertation, and states four points:The first point is the research background and objectives; the second point is the research mentality, i.e. the thinking map; the third point is the research methodology; the last point is the major contribution and limitation of this dissertation.Chapter two is the literature review. Firstly, it reviews the history and current status of internal control theory, and comments on the research findings both at domestic and abroad. Secondly, based on the research status of internal control evaluation, it reviews the standards, frames and methodologies of the evaluation system. Ultimately, it reviews the main practice of commercial banks in term of internal control evaluation. This chapter provides theoretical support for subsequent research, and helps to conduct specific analysis.Chapter Three performs theoretical analysis. The first sector focuses on highlighting the necessity of employing internal control evaluation system. Sector two builds the theoretical structure of this dissertation, mainly from objectives, principles and key factors. It also provides direction for index selection of this system. Sector three demonstrates the basic theory and advantages of analytic hierarchy process, which helps to quantify the result of internal control evaluation.Chapter four is the major part of this dissertation. It conducts analysis on the case of ICBC. Sector one introduces ICBC’s history, company structure, business and risk control strategy, which paves the way for setting the internal control evaluation index. Sector two builds internal control evaluation indexes which includes process evaluation index and result evaluation index. Specifically, the process evaluation index is based on the five internal control factors, and contains five tier one indexes,19tier two indexes and67tier three indexes. Sector three describes the process of ICBC internal control evaluation. Here, the importance of each index is calculated using analytic hierarchy process, and is listed in the weight table; then the comments pool is constructed. At last, the process evaluation feedback is collected by gathering the questionnaire answered by employees of ICBC, while the result evaluation feedback is collected by enquiring on ICBC’s financial statements. When collection is finished, these evaluation data is transferred to the degree of membership to each comment by employing the membership function. Finally, the weight vector of each index is multiplied by corresponding membership matrix to obtain the fuzzy control matrix of ICBC’s internal control. This matrix is then multiplied by the fractional column vector to generate the evaluation result. Sector four is an analysis to the evaluation results above. It refers to the five factors of internal control evaluation and gives analysis on their advantages, disadvantages and suggestions for improvement.Chapter five focuses on conclusions and prospects. Sector one concludes that it is applicable to adopt the internal control evaluation system built by this dissertation, especially with the success example of ICBC, which is the most profitable bank in the world. Sector two raises expectations and suggestions to subsequent research. Firstly, the research sample should be larger and include more different types of bank. Secondly, more data should be obtained to expand the sample with the purpose of reduce sampling error. Finally, it is suggested that researchers have deep understanding on commercial banks’business practice and internal control operation to find indexes that are more reasonable.CONTRIBUTIONThere are three main contributions:(1)The dissertation refers the views of ’The Basic Standards of Internal Control’ and ’The Guidelines of Enterprise Internal Control Evaluation’, and builds an internal control evaluation system for commercial banks. This system is more detailed and practical.(2)This dissertation performs discussion in the necessity of building internal control evaluation system not only from the aspect of accounting, but also from financial theories. It fills the gap between two subjects, and conducts analysis with dimensional thinking.(3)This dissertation involves bringing mathematic methodology into internal control evaluation. Moreover, it uses analytic hierarchy process and fuzzy evaluation method to transfer qualitative description into quantitative data. It is proved to be a very effective technique to collect raw data by questionnaire, and then deal with the data using membership function.