An Empirical Study Between The Executive Compensation And Internal Control Deficiency

On May 14,2013,Committee of Sponsoring Organizations of the Treadway Commission updated Internal Control-Integrated Framework (hereinafter referred to as IC-IF) in order to adapt to the development of further demand, which added 17 principles under five elements. Given IC-IF’s influence, the updated IC-IF bound hurricane blowing in the world again, causing the new research boom of internal control.In China,26 April 2010, the Ministry of Finance and other four ministries to further development of the "Internal Control Practice", "Evaluation of Internal Control Guidelines" and the "Internal Control Audit Guidelines" (hereinafter referred to as supporting guidelines), implemented at the Main Board listed companies of Shanghai Stock Exchange and Shenzhen Stock Exchange since January 1,2012. Medium-sized listed companies and non-listed companies which implement Basic Norms of Enterprise Internal Control and supporting guidelines should disclosure internal control self-assessment report and should also hire an accounting firm for auditing effectiveness of internal control on financial reporting and issuing audit reports. So far, the disclosure of internal control’s information has been from voluntary to mandatory completely. This will help the quality of listed companies’ financial reporting information to further improve.In the above context, companies can find and identify internal control deficiencies by 17 principles of the updated IC-IF, that the updated IC-IF provides qualitative analysis of the internal control deficiencies a more authoritative basis, improving the operability of 5 elements. Meanwhile, China’s main board listed companies should be compliance requirements, issuing a 2012 internal control audit report in 2013. Taking this opportunity, this article will take 2012 all listed companies in Shanghai Stock Exchange and Shenzhen Stock Exchange as the research object, researching the reliability of the internal control audit reports and depending on the updated IC-IF to define internal control deficiencies,studying the relationship between internal control deficiencies and executive compensation in order to give some suggestions for the construction and improvement of China’s listed company’s internal control system.This paper reviews the related literature of internal control deficiencies and executive compensation, based on the updated IC-IF, and combines internal control self-assessment report, internal control system and so on to establish internal control deficiencies associated with executive compensation stand model, using the three-stage least squares method to study the interaction between internal control deficiencies and executive compensation. It is found that executive compensation has a positive impact on internal control deficiencies, and internal control deficiencies have a negative impact on executive compensation. Based on the above findings, the paper put forward four-point policy recommendations to listed companies and the Chinese government:improving basic norms again, regulating the internal control deficiencies disclosure system, taking full advantage of the interaction between internal control deficiencies and executive compensation, appropriately reducing intervention efforts for listed companies.