Research On Governance Effects Of Internal Audit Function Of Private Enterprises: A Life Cycle Perspective

As a governance mechanism, the important role of internal audit function(IAF) in corporate governance has been widely recognized. The IAFs of state-owned enterprises are set up because of laws, oppositely, private enterprises set up IAFs totally by its own idea to improve its governance. On the other side, the enterprises always develop on a certain development track. When they are in different life cycle phases, they have different characteristics and problems, the IAFs adjust then. So, whether will IAFs of private enterprises have governance effects? If there are differences during different life cycle phases? Can these be improved? Answers of these questions will enrich and extend the theoretical and practical research of internal audit.First, this paper defines what governance effects of IAF is. Then it establishes a logical analysis path to analyze governance effects of IAF in life cycle perspective. The logical analysis path is combined with life cycle theory, accountability theory, value chain theory and theoretical framework of IA of private enterprises put forward by Tan et al. Also, this paper sorts three stages which IA system’s development path in our country.Furthermore, based on 2010-2014 annual data from the private listed companies of A-shares market in China, the results of empirical tests shows that: 1) IAFs of private enterprises are helpful to add value by reducing agency cost and improving both profitability and the quality of financial reporting; 2) When private companies in different life cycle phases, the impact of IAFs are significantly different among the quality of financial reporting, profitability and indirect agency cost without direct agency cost; 3) IAFs of private enterprises in growth stage are failed in financial accountability while well behaved in management accountability; 4) Governance effects of IAFs of private enterprises in maturity stage are the best, both financial and management accountability perform effectively; 5) IAFs of private enterprises in decline stage are excellent in financial accountability because of experiences, however,the performances of management accountability are inhibited.This paper uses the method which the normative research and positive researchunifies. The established logical analysis path for governance effects of IAF of private companies expand the theoretical research and perspective of IA. Also, for the object of study, the selection of private enterprises enriches the methods and scope of IA research.When it comes to the real diagnosis research, unlike the static study always used before,the life cycle perspective makes a beneficial attempt. This is an affirmative answer for the effectiveness of IAFs to participate in corporate governance from the angle of demonstration under the background of Chinese system. It also provide a new approach to explore the inherent law of enterprise development and IA further.