A Study On The Impact Of Mandatory Internal Control Audit On Excess Goodwill

In recent years,M&A transactions in China’s capital market have occurred frequently,and a large number of listed companies have given high M&A consideration to the acquiree in the process of M&A,resulting in high premium M&A.Such M&A transactions have rapidly accumulated a huge amount of goodwill assets in the A-share market,and the problem of excess goodwill arises at the historic moment.Reasonable goodwill can achieve the expected synergy and create value for enterprises,while excessive goodwill will weaken the competitiveness of enterprises’ products in the market,damage business performance,and even cause systemic risks,endangering the healthy development of the capital market.Therefore,it is of great value to explore how to curb excess goodwill.As an independent external governance mechanism,mandatory internal control audit has been implemented in China for more than ten years,and its relevant systems have been gradually developed and improved.The existing academic research shows that mandatory internal control audit can strengthen the supervision of audit,improve the internal control construction of listed companies,and improve the governance level of listed companies.However,whether the corporate governance effect of mandatory internal control audit can radiate to the suppression of excess goodwill has not been answered by the existing research.Taking all A-share listed companies in China from 2007 to 2021 as research samples,this paper empirically tests the inhibition of mandatory internal control audit on excess goodwill by using the multi-point double difference model according to China’s policy of implementing mandatory internal control audit in batches,and empirically tests the intermediary mechanism of mandatory internal control audit on excess goodwill from the perspective of audit input and internal control deficiencies.Moreover,the empirical results of this paper are still valid after parallel trend test,propensity score matching test,placebo test and major variable replacement test,and have certain robustness.In addition,this article conducts heterogeneity testing based on the perspectives of property rights nature,voluntary internal control auditing,and accounting firm size,and explores the moderating mechanism of mandatory internal control auditing to suppress excess goodwill.In further analysis,this paper conducts panel quantile regression for excess goodwill,and discusses the economic consequences of mandatory internal control audit on restraining excess goodwill.The results show that:(1)Mandatory internal control audit can significantly inhibit excess goodwill of listed companies;(2)Mandatory internal control audit can restrain excess goodwill by increasing audit input and correcting internal control deficiencies;(3)For nonstate-owned listed companies,listed companies that have not conducted voluntary internal control audit,and listed companies that employ the top ten accounting firms,mandatory internal control audit has a more significant inhibitory effect on excess goodwill;(4)The more serious the problem of excess goodwill of listed companies,the more significant the inhibitory effect of mandatory internal control audit on excess goodwill;(5)Mandatory internal control audit can enhance enterprise value by restraining excess goodwill.The contributions of this paper are as follows:(1)It verifies the inhibitory effect of mandatory internal control audit on excess goodwill,enriches the literature on the economic consequences of mandatory internal control audit in China,and expands the research on excess goodwill inhibition mechanism,which not only provides evidence for the governance effect of mandatory internal control audit,but also provides certain theoretical support for listed companies to suppress excess goodwill;(2)Based on the perspective of mandatory internal control audit and excess goodwill,this paper puts forward some policy suggestions,such as expanding the scope of implementation of mandatory internal control audit,improving the format of mandatory internal control audit report,clarifying the identification criteria of internal control deficiencies,and standardizing the transaction process of mergers and acquisitions,which are conducive to improving the audit system and restraining excess goodwill.