The Impacts Of Characteristics Of Board Of Directors On The Effectiveness Of Internal Control Over Financial Reporting

In recent years, many financial fraud cases have been exposed in the capital market, which makes the internal control over financial report become the focus of public attention. The internal control over financial report is an important way to improve the quality of accounting information in the capital market. And the effectiveness is the core of the internal control over financial report. Therefore, how to enhance the effectiveness of internal control over financial reports of listing corporations, to guarantee the accounting information from the capital market is true and reliable, has become a common concern of the theoretical and practical issues. The board of directors is the core of corporate governance structure, which is ultimately responsible for the design and operation of the internal control over financial report. Hence, the feature of which will inevitably affect the effectiveness of internal control over financial reporting.Based on the literature review and theoretical analysis, the paper analyzes how characteristics of the board impact the effectiveness of internal control over financial report and puts forward the research hypothesis. It selects 2092 listing corporations from Shanghai and Shenzhen A shares during year 2010 to 2012, a total of 4790 observation samples. The paper empirically tests the board characteristics’ influence on the effectiveness of internal control over financial reporting. Combined with the empirical results, it puts forward recommendations to perfect the governance of board of directors, improve the effectiveness of internal control over financial reporting.This paper makes a full measure of the characteristics of board of directors by such four dimensions: organization characteristics, behavior characteristics, motivation characteristics and quality characteristics, which include board size, proportion of independent directors, two duty syncretic, the frequency of board meeting, the shareholding ratio of directors, the average payment of directors, the average age of directors. From the target-drive perspective, this paper uses the model Chil-Yang Tseng(2007) made in the construction of risk management index, which was to measure the degree of objectives financial report achieved. Therefore, the paper measures the effectiveness of internal control over financial reporting from such four aspects: earnings management, weaknesses in internal control over financial reporting, audit opinion and financial restatement.As the results show, the size of the board has little impact on the effectiveness of internal control over financial report. The proportion of independent directors does not improve the effectiveness as well. And the two duty syncretic significantly reduces the effectiveness of internal control over financial reporting. The higher the frequency of the meeting by the board of directors, the lower the effectiveness is. Meanwhile, the shareholding ratio and the average payment of directors do not significantly enhance the effectiveness of internal control over financial reporting. Hence the incentive mechanism on the board of directors should be perfected. The average age of directors is without affecting the effectiveness of internal control over financial report either. Therefore, the paper puts forward suggestions to improve the effectiveness from five aspects below: rational determination of the size of the board, perfecting the system of independent directors, the establishment of two post separation board structure, improving the efficiency and effectiveness of meetings by the board of directors, improving the incentive mechanism for directors.This paper comprehensively uses the literature research method, normative analysis, empirical analysis to analyze the influence of board characteristics on effectiveness of internal control over financial reporting. It shows that a sound and effective board will help to improve the effectiveness of internal control over financial reporting. The study provides guidance for listing companies to perfect their governance and improve the the effectiveness of internal control over financial report. It also provides a theoretical basis for relevant policy making by the supervision department.