内部会计控制相关的外文翻译.docx
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DisclosureonInternalControlSystems
AsaSubstituteofAlternativeGovernanceMechanisms
SergioBeretta
AccountingDepartment
BoccioniUniversity
Accordingtoagencytheory,variousgovernancemechanismsreducetheagencyproblembetweeninvestorsandmanagement(JensenandHeckling,1976;Gillan,2006).Traditionally,governancemechanismshavebeenidentifiedasinternalorexternal.Internalmechanismsincludetheboardofdirectors,itsrole,structureandposition(Fama,1980;FamaandJensen,1983),managerialshareownership(JensenandMeckling,1976)andincentives,thesupervisoryroleplayedbylargeshareholders(DemsetzandLehn,1985),theinternalcontrolsystem(BushmanandSmith,2001),bylawandcharterprovisions(anti-takeovermeasures)andtheuseofdebtfinancing(Jensen,1993).Externalcontrolisexertedbythemarketforcorporatecontrol(GrossmanandHart,1980),themanageriallabormarket(Fama,1980)andtheproductmarket(Hart,1983).
Afterthevariousfinancialscandalsthathaveshakeninvestorsworldwide,corporategovernancebestpracticeshavestressedinparticularthekeyroleplayedbytheinternalcontrolsystem(ICS)inthegovernanceofthefirm.Internalcontrolsystemscontributetotheprotectionofinvestors’interestsbothbypromotingandgivingassuranceonthereliabilityoffinancialreporting,andbyaddressingtheboards’attentiononthetimelyidentification,evaluationandmanagementofrisksthatmaypromisetheattainmentofcorporategoals.ThesefunctionshavebeenwidelyrecognizedbythemostdiffusedframeworksforthedesignofICSthathavestatedthecentralityofinternalcontrolsystemsinprovidingreasonableassurancetoinvestorsregardingtheachievementofobjectivesconcerningtheeffectivenessandefficiencyofoperations,thereliabilityoffinancialreportingandthepliancewithlawsandregulations(COSO,1992;2004).
Notwithstandingtheirrelevance,investorscannotdirectlyobserveICSsandthereforecannotgetinformationontheirdesignandfunctioningbecausetheyareinternalmechanisms,activitiesandprocessesputinplacewithintheorganization(DeumesandKnechel,2021).
Asinvestorstakeintoaccountthecoststheysustaintomonitormanagementwhenpricingtheirclaims(JensenandMeckling1976),managementhaveincentivestomunicateinformationonthecharacteristicsoftheICSinordertoinforminvestorsontheeffectivenessofICSwhenothermonitoringmechanisms(theownershipstructureofthefirmandtheboardofdirectors)areweak,andtherebyprovidingthemwiththeconvenientlevelofmonitoring(Leftwichetal.,1981).Thepossibleexistenceofsubstitutionamongdifferentmechanismshasbeendebatedincorporategovernanceliterature(RedikerandSeth,1995;FernandezandArrondo,2005)basedonWilliamson’s(1983)substitutehypothesis,whicharguesthatthemarginalroleofaparticularcontrolmechanismdependsuponitsrelativeimportanceinthegovernancesystemofthefirm.
Inthispaper,wecontendthatdisclosureonthecharacteristicsofICSisarelevantalternativegovernancemechanisminthemonitoringpackageselectedbythemanagement.AccordingtoLeftwichetal.(1981)“managersselectamonitoringpackageandthepositionofthechosenpackagedependonthecostsandbenefitsofthevariousmonitoringdevices〞(p.59).
Inparticular,wefocusparticularontherelationshipbetweenICSdisclosureandtwoothermechanismsofthemonitoringpackage(theownershipstructureofthefirmandtheboardofdirectors)thataccordingtoliterature(JensenandMeckling,1976;FernandezandArrondo,2005;Gillan,2006)playarelevantroleinmonitoringmanagement’sbehavior.WepositthatincentivesforreportingonthecharacteristicsofICSdependonthesupervisoryroleplayedbythefirms’ownershipstructureandboardofdirectors.
WethereforeexaminethecontentsandextentofICSdisclosureof160Europeanfirmslistedinfourdifferentstockexchanges(London,Paris,FrankfurtandMilan)onathree-yearperiod(2003–2005).Byusingthisinternationalsample,weareabletothedepictsomefeaturesofdifferentinstitutionalenvironments.
WefindevidencethatdisclosureonICSisasubstituteforthemonitoringroleplayedbyothergovernancemechanismsasownershipconcentration,institutionalownership,theproportionofindependentdirectorssittingontheboardandtheproportionofaccountingexpertmembersontheauditmittee.
WeaddtopreviousliteratureonthegovernanceroleplayedbydisclosureonICSbyadoptingapletedisclosureframeworkthatallowsustoconsiderindetailthecontentandextentofinformationthemanagementdiscretionarilymunicatesontheICSofthefirm.WhilecorporategovernancebestpracticesaskforthedisclosureonthecharacteristicsoftheICS,theydonotprovideinstructionsonwhatmanagementshoulddiscloseandontheextentofsuchdisclosure.SuchlackofinstructionsleavesmanagementwithadiscretionarychoiceonthenarrativecontentofICSdisclosure.
ThispaperoffersempiricalsupportforWilliamson’s(1983)substitutehypothesisamongdifferentgovernancemechanismsandithasrelevantpolicyimplications.Whilemostcorporategovernancestudiesconsiderdisclosureasaplementarymechanismmanagementadoptstoreinforcethegovernancesystemofthefirm(ChenandJaggi,2000;EngandMak,2003;Barakoetal.,2006)andindeedprovidecontrastingresults,inthisstudyweshowthatdisclosureonICSsubstitutesforothergovernancemechanisms.Thismeansthatnotnecessarilybettergovernanceimpliesgreatertransparencyanddisclosure.FirmsadheretocorporategovernancebestpracticesbydisclosinginformationontheICSandsuchdisclosureismoreextensivewheninvestorsneedmoreassuranceabouttheprotectionoftheirinterests,whenothergovernancemechanismsareweak.Ontheotherside,whenthegovernancesystemissound,managementhavelessincentivestoextensivelydiscloseinformationontheICS,asthisisacostlyactivityanditsbenefitsareoverwhelmedbytheothergovernancemechanisms.
Theevidenceprovidedbytheempiricalresearchhasimportantpolicyimplications,becauseitoffersinsightstofirmsandpractitionersontherelevanceofdisclosureoninternalcontrolsystemsasamonitoringmechanismforinvestors.Theremainderofthepaperisstructuredasfollows.Thenextsectionreviewsthetheoreticalbackgroundanddevelopstheresearchhypotheses.Theresearchmethodisdescribedinsection3,followedbyresultsdiscussedinsection4.Concludingremarksarepresentedinthelastsection.
TheoreticalBackgroundandHypothesesDevelopment
Accordingtocorporategovernanceliterature,themaininternalmonitoringmechanismsaretheboardofdirectors,theownershipstructureofthefirm,andtheinternalcontrolsystem(Gillan,2006).Inparticular,ICSsplayacentralroleintheprotectionofinvestors’interestsbothassuringthereliabilityoffinancialreportingandpromotingthetimelyidentification,assessmentandmanagementofrelevantrisksthatencumberuponthebusiness.ThecentralityofICSincorporategovernancehasbeenwidelyrecognizedbythevastmajorityofcodesofbestpractice1.
Inordertoexpresstheirconcernsandpricetheirclaims,investorsneedtogetinformationonthedesignandfunctioningofmonitoringmechanisms.Inthecasesofmechanismsliketheownershipstructureandtheboardofdirectors,informationconcerningstructureandposition,typeandpositionofmitteesinplace,numberofmeetingsandsoon,ispubliclyavailable.Insomeothercases,theenforcementofreportingonICSweaknessesormaterialdeficiencies–likethoserequiredbytheSOX-provideinvestorswithrelevantinformationaboutpossiblegapsinthefunctioningoftheICS(Leone,2007).
Nevertheless,specificinformationonthecharacteristicsoftheICSisindeedmoredifficultandexpensivetogatherbecauseICSsareplexsetsofactivitiesandprocessescarriedoutinternallytothefirm(DeumesandKnechel,2021;Bronsonetal.,2006).Indeed,whilecorporategovernancebestpracticesrequiretodiscloseinformationontheICS,theydonotprovideinstructiononthenarrativecontentsofICSdisclosure.Therefore,investorsareunlikelytobeinformedaboutthenature,extent,processesandqualityofinternalcontrols,unlessdisclosureonthecharacteristicsoftheICSisprovidedbythemanagement.Thecontentandextentofsuchdisclosurewilldependontheexistingmonitoringpackage(Leftwichetal.,1981;Williamson,1983)ofthefirm.
Atthebestofourknowledge,disclosureonthespecificcharacteristicsandfunctioningofICShasbeendeservedpoorattention.WhiletheintroductionoftheSOXintheUSA,andtherelatedrequirementfordisclosureonICSdeficienciesormaterialweaknesseshasincreasinglyattractedacademicinterestinrecenttimes(amongtheothersseeAshBaughetal.,2007;Doyleetal.,2007;Leone,2007),onlyfewstudiesfocusedonthespecificcharacteristicsofICSdisclosure.
Bronsonetal.(2006)examinefirmcharacteristicsassociatedtodisclosureonICSbeforeitwasmademandatorybySOX.Theyfindapositiveassociationbetweenthelikelihoodofissuingamanagementreportoninternalcontrolandcorporategovernancevariableslikethenumberofauditmitteemeetingsandthepercentageofinstitutionalshareholders.DeumesandKnechel(2021)identifyalistofsixdisclosureitemsthatcapturetheICSinformationgenerallyavailableintheannualreportsoffirmsanalyzed.TheyfindthatthedisclosureindexonICSissignificantlyassociatedtovariablesthatproxyfortheagencycostsofequityandwithvariablesthatproxyforagencycostsofdebt.
Accordingtoourtheoreticalframework,ifdisclos
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