Ownership Restriction Of Y Company And Effectiveness Of Internal Control

Internal control is implemented by the board of directors, supervisors, managers and staff, to control the control-related objects. Establishing effective internal control is conducive to improve the level of companies’ management and the ability of risk prevention. The effectiveness of internal control is determined by two aspects. On the one hand, it depends on a sound internal control system. On the other hand, the established internal control system must have an effective role in the process of implementation, including the design effectiveness of internal control and the effectiveness of performance. The current literature generally thinks, a sound internal control system is the basis and prerequisite for the effectiveness of internal control.Based on the case study of Y company, this article is trying to study the significance of the entrepreneurial team with ownership restriction for improving the effectiveness of internal control. This paper finds out that there are many obvious defects in the internal control system of Y company. But the company’s internal control seems to be effective because the entrepreneurial team with ownership restriction make up the integrity of defects in internal control system. The theoretical implication of this case study is that for the initial development stage of a company, the integrity of internal control system is prerequisite for the effectiveness of internal control if the company’s ownership structure shows the characteristics of ownership restriction of entrepreneurial team.This paper also analyzed the mechanism of how entrepreneurial team with ownership restriction affects the effectiveness of internal control. Entrepreneurial team’s balanced shareholding is a special ownership structure of listing Corporation. Entrepreneurial team members are major shareholders and also company executives, who play the company’s key management roles. Like the major shareholders, they have a common vision and goals for the company’s future, and they have a strong sense of responsibilities. The entrepreneurial team members control a company’s key points (position). This kind of depending on the management of the "rule of man" to replace the system of control and process control in a certain extent promotes the formation of an effective internal control environment, and thus enhances the effectiveness of internal control. The entrepreneurial team with ownership restriction makes entrepreneurship team members become conscious. However, this management method has some obvious risks and defects. When the company’s business becomes more and more complex, and the level of management continuously may also increase, relying solely on the entrepreneurial team "rule of man" will leave the company more and more vacancies in internal control key points, which thus significantly increases risks of the enterprise. Therefore, this view of the article is that even if the current entrepreneurial team ownership ensure effective internal controls, this effectiveness is temporary. Enterprises should follow the guidelines for the internal control requirements to establish the internal control system and this is the fundamental guarantee for a company’s sustainable development.The innovation of this paper is mainly in following two aspects:one is the innovation of research perspective. In this paper, from the perspective of the entrepreneurial team with ownership restriction, we explore the formation mechanism of the effectiveness of a company’s internal control, which enriches the internal control literature. On the other hand, this paper has a new finding, which develops the current internal control theory. Based on the case study of Y company, this paper finds that in the internal control environment (including the entrepreneurial team with ownership restriction), a sound internal control system is not the prerequisite condition for the effectiveness of internal control, and this finding helps to deepen the understanding of the theory of the effectiveness of internal control.The conclusion of this paper also has some inspirations to the construction of a company’s internal control system:one is that when the enterprise internal control system is not perfect, it needs to rely more on optimizing the effectiveness of internal control environment, including better ownership structure. On the other hand, from the long-term development perspective, the enterprise should gradually improve the internal control system, establishing a sound and effective internal control system.