The publication of this book was supported by the “Special Fund for Basic Scientific Research of the Central University (Item number: 22YJ090005)

Chengyao，Business School， Professor， Beijing Language and Culture University

YuBeibei，Phd In accounting， China Academy of Fiscal Science

Foreword

This book is intended from the “Enterprise internal control basic norms”, “Enterprise internal control supporting guidelines” and other rules and regulations of the promulgation and implementation, analysis of the internal control system of our listed companies and capital markets, the impact of internal control evaluation system and identification research. On June 28,2008, the Ministry of Finance, the Securities Regulatory Commission, the Audit Commission, the Banking Regulatory Commission and the Insurance Regulatory Commission jointly issued the basic standards for Internal Control of Enterprises (hereinafter referred to as the basic standards) , in the same year, it also issued the “Notice on the issuance of the basic norms of internal control of Enterprises”(hereinafter referred to as the notice) , requiring companies listed both in China and abroad to implement the basic norms from January 1,2011, and companies listed both in Shanghai and Shenzhen to fully implement the basic norms from January 1,2012, large and medium-sized listed companies are encouraged to implement the basic norms in advance. The Basic Code requires listed companies to disclose internal control self-evaluation reports and engage Certified Public Accountant to conduct audits, the above-mentioned departments also jointly issued the “Corporate internal control supporting guidelines”(hereinafter referred to as the “Supporting guidelines”) . Since then, the compulsory system of internal control of listed companies in China has formed initially. The compulsory system of internal control is mainly composed of the compulsory disclosure system and the compulsory authentication system. The enforcement of internal control will certainly have an impact on our listed companies.

Internal control is originally the endogenous management requirements of listed companies, but with the increasing complexity of economic matters, internal control has gradually become an important means of governance fraud, therefore, in order to realize the internal management and external supervision of the listed companies, the internal control is the endogenous management of the enterprises. How to conduct internal control of listed companies will also become the focus of theory and practice. Similar to the Sarbanes–Oxley Act issued in the US in 2002, our current internal controls on listed companies are stricter, with regulations requiring listed companies not only to compulsorily disclose their internal self-assessment reports, but also to make them more transparent, it also requires Certified Public Accountant to review the effectiveness of internal controls of listed companies. Therefore, the first issue of this book is the impact of internal control compulsory disclosure system on the agency cost of our listed companies, that is, through empirical analysis of the impact of internal control on the agency cost of listed companies, then the necessity of the implementation of the internal control compulsory disclosure system is obtained. It is generally believed that an economic event will affect the capital market, that is, the enforcement of internal control system will affect the earnings of shareholders of listed companies in China. Therefore, the second issue of this book is the impact of internal control mandatory disclosure system on the cumulative excess return of our listed companies.

This book intends to analyze the impact of internal control compulsory disclosure system on our capital market through the event study method. At present, the compulsory rules and regulations for internal control issued by China (basic norms and its supporting guidelines, etc. only stipulate the basic principles, objectives, framework and core control points for the establishment of internal control by listed companies, how to effectively promote and improve the internal control level of China's listed companies, disclosure of mandatory compliance requirements, has become an urgent issue for listed companies to be resolved. For this reason, the third problem of this book is to construct the weight design of the Evaluation Index of the internal control of the listed companies in China through the mathematical method, in order to build a reasonable evaluation system of the internal control of the listed companies. Provide guidelines for investors to analyze the internal control level of listed companies. On this basis, the fourth issue of this book is to provide advice for the Accounting networks and associations to construct a reasonable internal control verification system.

There are seven chapters in this book. The first chapter puts forward the whole frame of the article by analyzing the research aim, research significance, structure arrangement, innovation point and so on. The second chapter describes the previous research results, aiming to provide background introduction and theoretical guidance for the research ideas, research methods and innovations of this paper. The third chapter analyzes the influence of internal control on the agency cost of listed companies in China, and then obtains the necessity of the implementation of internal control compulsory disclosure system. Chapter IV from the internal control disclosure system of the cumulative excess return of listed companies in China, the impact of internal control mandatory disclosure system on China's capital market. Based on the internal control system norms issued at the present stage in China (“Basic norms” and its supporting guidelines) only stipulates the basic principles, objectives, framework and core control points for the establishment of internal control system of listed companies in China, how to effectively promote and improve the level of internal control of our listed companies, disclosure of mandatory compliance requirements for investors to provide more rigorous and effective information, has become an urgent problem to be solved. Therefore, the Fifth Chapter Constructs the Valuation Index of the Internal Control Evaluation of China's listed companies by AHP and other mathematical methods, and provides the guidance for investors to analyze the internal control level of listed companies. The sixth chapter tries to construct a reasonable internal control authentication arrangement from the aspects of theory, risk, audit cost and so on. The last part is the conclusion chapter of this paper, which is a summary of the main conclusions of this book, an overview of the shortcomings and the prospects for future research.

The logical structure of the article is to first put forward the background of the mandatory system of internal control of listed companies in China, that is, from 2009, listed companies should and must disclose their internal control self-evaluation reports and be audited by the Certified Public Accountant. The third and fourth chapters of this article empirically analyze the relevant influence and draw the test conclusion, that is to say, the mandatory disclosure system of internal control will reduce the agency cost of enterprises, but from the perspective of Capital Market, the empirical results of accumulated excess returns prove that investors do not seem to buy it. Therefore, the fourth and fifth chapters of this article, from the perspective of investors and Certified Public Accountant, provide the theoretical basis for the establishment and evaluation of the internal control system of listed companies, and provide policy recommendations for the Certified Public Accountant to identify the internal control. The innovation of the article is that internal control is a new topic in China, and there are few relevant empirical studies. Through collecting data by hand, this paper empirically analyzes the impact of the incident of internal control compulsory system on agency cost and capital market, the weighting of evaluation indexes, and the regression analysis of internal control audit cost, internal Control for the current hot research topic to provide more empirical analysis and theoretical guidance.

Abstract

Since the regulations of "Basic Standard for Enterprise Internal Control", “Enterprise Internal Control Guidelines” are implemented, this paper mainly focuses on the analysis of the impact of internal control disclosure in China, especially in the capital markets, and how to build the path of the rating system.

The Ministry of Finance jointed the Securities Regulatory Commission, the Audit Commission, the China Banking Regulatory Commission and China Insurance Regulatory Commission, issued the internal control basic standards on June 28, 2008,   which provides the framework of internal control for enterprises in China. What’s more,those regulators released the notification for guidelines of implementation,and the relevant departments jointly issued the enforcement regulation on April 26,2010. Since then, the internal control system is initially formed, which enforces Chinese public companies announce and auditors audit their internal control reports.

Internal control was originally the endogenous management requirements for companies, which pay attention to prevent frauds. Compared to the Sarbanes-Oxley Act of 2002, our Chinese regulation relevant to the internal control is stringent, which requires public companies disclose their internal self-assessment reports and certified public accountants audit the reports. Given this, the article mainly focuses on the impact of the regulation for the agency costs, and CAR in the capital market, and how to evaluate the internal control construction in china. This article have seven chapters, the first chapter mainly discusses the purpose, significance, structural arrangements, innovation and overall framework of the article. The second chapter discusses the the previous literature review. Chapter Ⅲ to Chapter VII mainly talk about the impact and the appraisal of the internal control regulations in empirical method. The structural logic of the article firstly proposed the background of internal control disclosure system in China, after analyzing the impact of mandatory disclosure, we find that it can reduce the agency costs. However, the investors seem to pay no attention to the internal reports in terms of the capital markets. Therefore, under the perspective of investors, the article builds theoretical basis of the evaluation index weights and the authentication in China. The innovation of the article is that there are few relevant empirical research’s of the internal control in China. From the empirical analysis of the internal control disclosure, we further understand the impact of the regulation on the agency costs and the capital market, the design of evaluation index weight, and the reification arrangements in China.

Keywords: Internal control disclosure system; Agency cost; CAR; Internal control evaluation system; Internal control attestation arrangement.