An Empirical Study About Influence Of Internal Control Weaknesses To Irregularities And Litigation Risk Of Public Companies

The frequent occurrence of financial fraud and even bankruptcy cases of public Corporation in the global scope has become the focus of internal control research of many scholars and practitioners, governments and regulators in many countries issued a series of acts of the internal control specifically.After the Enron case, in 2002 the US Congress passed the SOX Act, enactment of this bill takes attention of many scholars about the effectiveness of internal controls.In 2008 the Ministry of China Finance Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission and the Audit Commission promulgated the "Basic Standard for Enterprise Internal Control", after 2010, with three Internal Control Guidelines promulgated, our internal control standard system is basically formed.As an important mechanism of modern enterprise management, to ensure corporate compliance law and act is internal control’s basic objectives, and can further improve corporate governance, to promote the healthy development of capital markets. But now China’s securities market stays in the transition period, in recent years, violations of the public companies have occurred frequently, due to information asymmetry, the majority of investors are difficult to grasp the situation and the company’s internal control and possible violations, and therefore the information disclosure of internal control as the securities abatement illegal market chaos system has become an inevitable choice. In addition, a large number of lawsuits against health hazards public companies growing, seriously damaging the interests of the company stakeholders, litigation risk has become an important factor affecting the survival and development of the company. In the actual implernentation,whether internal control can effectively prevent irregularities and litigation risk of the company, to ensure compliance goals, this article will research and analysis the intrinsic relationship between the internal control deficiencies and irregularities and litigation risks in-depth,from the micro level providing the need to strengthen the enforcement mechanisms of the laws, regulations and policies, and further enrich the study of law and finance and investor protection.Internal control defects make the design or operation of internal control can not guarantee the realization of internal control objectives.the important reason of illegal behaviors of public companies and even litigation is that internal control in the enterprise has not get due attention-the system construction is not in place, or the executive power is not enough, which resulted in the problems of internal control deficiencies. In companies which the internal control system is relatively weak, the system is not perfect, operation efficiency and property safety is not guaranteed and other issues, which led to the company financial report quality is reduced, and the occurrence of fraud and other violations of law.At present, the situation of public Corporation whether comply the law and act is grim, the number and the amount of of lawsuits grows substantially.The increase of illegal violations in enterprises in sone extent reflect the corporate social responsibility fulfillment situation is not ideal, to the detriment of the interests of stakeholders, but also a serious threat to their continued survival and healthy development.Through theoretical analysis and empirical testing, we make a research about internal control defect and listed companies violations and litigation risk, combined with China’s securities market irregularities and the risk of litigation system factors and the company’s own factors, examine the internal control deficiencies and the company’s violation of regulation and litigation risk. Research shows that:(1) internal control is more effective, the possibility of the enterprise against tne irregularities is lower;(2) the company with internal control deficiencies has higher litigation risk; (3) differences in the actual controller also lead to listed companies to suffer different penalty of violations of disciplinary action; (4) Take a further study about internal control deficiencies, we found the severity of the disclosure of internal control deficiencies and the number of internal control deficiencies can’t explain the company’s litigation risk. This shows the effectiveness of the internal control indeed in a certain extent, affect the enterprise legal compliance operation; but the securities market of our country exist certain particularity, especially the control of state owned enterprises in the administrative and property rights, making in China’s capital market and legal supervision of the implementation of the political hierarchy and social relations play a unique role; in addition, during the research we found that due to the low quality of disclosure of internal control information, the results failed to fully meet the expectations hypothesis. Therefore, it is urgent to unity and refine the standards for the contents and forms of internal control information disclosure.This paper is divided into six chapters. Chapter one is introduction, mainly introduces the background and significance of this paper, summarizes the research ideas and methods of this paper, the innovation and inadequacies of the article. The second chapter is literature review. From the definition and classification of internal control deficiencies, the control defects influence factors and economic consequences, illegal behavior of the company and the litigation risk research,then we found that the research about internal control weaknesses and violations of enterprises is less, research needs to be expand. The third chapter is about the framework and theory of internal control. This paper defines and distinguishes the internal control, internal control information disclosure, internal control defects, violations and litigation risks. The fourth chapter is the research design chapter.on the basis of the analysis above, we puts forward the following hypotheses:Hypothesis 1:internal control deficiencies and corporate violations punished are positively related to the likelihood; hypothesis 2: the internal control deficiencies and listed companies is positively related to the likelihood of litigation and arbitration; hypothesis 3:compared with state-owned enterprises, non state owned enterprises are more likely to suffer the risk of penalties for violations and legal proceedings; Hypothesis 4:the higher the number of internal control deficiencies, the higher the risk of litigation; Hypothesis 5:the higher severity of internal control deficiencies, the higher litigation risk. Based on the above assumptions, we select variables, build a model. The fifth chapter is the analysis of the empirical results. Descriptive statistics, correlation analysis and regression analysis were carried out on the sample data. The empirical test results show that h 1, hypothesis 2 and hypothesis 3 are verified, the four and five hypothesis are in deviation from the expected results. The sixth chapter is the conclusion and suggestion. This study found that internal control deficiencies of irregularities and litigation risk of listed companies has significant influence, but in the different nature of the property company influence in varying degrees, effects of the number and severity of internal control deficiencies of corporate litigation risk is not significant. According to the research conclusion, this paper puts forward some suggestions and measures to further improve the internal control information disclosure. Finally, the deficiencies of this paper and the future research direction are pointed out.