内部控制中英文文献.docx

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