内部控制中英文文献.docx
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内部控制中英文文献.docx
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内部控制中英文文献
Appendix:
DisclosureonInternalControlSystems
AsaSubstituteofAlternativeGovernanceMechanisms
Accordingtoagencytheory,variousgovernancemechanismsreducetheagencyproblembetweeninvestorsandmanagement(JensenandMeckling,1976;Gillan,2006)。
Traditionally,governancemechanismshavebeenidentifiedasinternalorexternal。
Internalmechanismsincludetheboardofdirectors,itsrole,structureandcomposition(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,evaluationandmanagementofrisksthatmaycompromisetheattainmentofcorporategoals。
ThesefunctionshavebeenwidelyrecognizedbythemostdiffusedframeworksforthedesignofICSthathavestatedthecentralityofinternalcontrolsystemsinprovidingreasonableassurancetoinvestorsregardingtheachievementofobjectivesconcerningtheeffectivenessandefficiencyofoperations,thereliabilityoffinancialreportingandthecompliancewithlawsandregulations(COSO,1992;2004)。
Notwithstandingtheirrelevance,investorscannotdirectlyobserveICSsandthereforecannotgetinformationontheirdesignandfunctioningbecausetheyareinternalmechanisms,activitiesandprocessesputinplacewithintheorganization(DeumesandKnechel,2008)。
Asinvestorstakeintoaccountthecoststheysustaintomonitormanagementwhenpricingtheirclaims(JensenandMeckling1976),managementhaveincentivestocommunicateinformationonthecharacteristicsoftheICSinordertoinforminvestorsontheeffectivenessofICSwhenothermonitoringmechanisms(theownershipstructureofthefirmandtheboardofdirectors)areweak,andtherebyprovidingthemwiththeconvenientlevelofmonitoring(Leftwichetal.,1981)。
Thepossibleexistenceofsubstitutionamongdifferentmechanismshasbeendebatedincorporategovernanceliterature(RedikerandSeth,1995;FernandezandArrondo,2005)basedonWilliamson’s(1983)substitutehypothesis,whicharguesthatthemarginalroleofaparticularcontrolmechanismdependsuponitsrelativeimportanceinthegovernancesystemofthefirm。
Inthispaper,wecontendthatdisclosureonthecharacteristicsofICSisarelevantalternativegovernancemechanisminthemonitoringpackageselectedbythemanagement.AccordingtoLeftwichetal。
(1981)“managersselectamonitoringpackage,andthecompositionofthechosenpackagedependsonthecostsandbenefitsofthevariousmonitoringdevices"(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,theproportionofindependentdirectorssittingontheboardandtheproportionofaccountingexpertmembersontheauditcommittee.
WeaddtopreviousliteratureonthegovernanceroleplayedbydisclosureonICSbyadoptingacompletedisclosureframeworkthatallowsustoconsiderindetailthecontentandextentofinformationthemanagementdiscretionarilycommunicatesontheICSofthefirm.WhilecorporategovernancebestpracticesaskforthedisclosureonthecharacteristicsoftheICS,theydonotprovideinstructionsonwhatmanagementshoulddiscloseandontheextentofsuchdisclosure。
SuchlackofinstructionsleavesmanagementwithadiscretionarychoiceonthenarrativecontentofICSdisclosure.
ThispaperoffersempiricalsupportforWilliamson's(1983)substitutehypothesisamongdifferentgovernancemechanismsandithasrelevantpolicyimplications.Whilemostcorporategovernancestudiesconsiderdisclosureasacomplementarymechanismmanagementadoptstoreinforcethegovernancesystemofthefirm(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,informationconcerningstructureandcomposition,typeandcompositionofcommitteesinplace,numberofmeetingsandsoon,ispubliclyavailable.Insomeothercases,theenforcementofreportingonICSweaknessesormaterialdeficiencies–likethoserequiredbytheSOX-provideinvestorswithrelevantinformationaboutpossiblegapsinthefunctioningoftheICS(Leone,2007).
Nevertheless,specificinformationonthecharacteristicsoftheICSisindeedmoredifficultandexpensivetogatherbecauseICSsarecomplexsetsofactivitiesandprocessescarriedoutinternallytothefirm(DeumesandKnechel,2008;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。
Theyfindapositiveassociationbetweenthelikelihoodofissuingamanagementreportoninternalcontrolandcorporategovernancevariableslikethenumberofauditcommitteemeetingsandthepercentageofinstitutionalshareholders.DeumesandKnechel(2008)identifyalistofsixdisclosureitemsthatcapturetheICSinformationgenerallyavailableintheannualreportsoffirmsanalyzed.TheyfindthatthedisclosureindexonICSissignificantlyassociatedtovariablesthatproxyfortheagencycostsofequityandwithvariablesthatproxyforagencycostsofdebt.
Accordingtoourtheoreticalframework,ifdisclosureonI
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