This paper systematically reviews the literature related to internal control from 1973 to 2017 , and reviews the internal control literature from two aspects at home and abroad. Based on this , the future research of China’s internal control is prospected.
As a mechanism of great concern, internal control has attracted many scholars to study it, which has led the academic and practical circles to study the quality of internal control. Many scholars use a variety of different research methods to evaluate the internal control of enterprises.
Doyle et al. (2007) and Ashbaugh-Skaife et al. (2008) found that the weaker the internal control of the company, the lower the accounting quality [
Lin et al. (2001) found that internal audits of enterprises help to reduce major flaws in internal control. Krishnan (2005) found that the more independent and professional the audit committee of the company, the less internal control problems the company has. Doyle et al. (2007) conducted a more comprehensive study on the factors affecting the quality of internal control. He found that the level of internal control of the company is closely related to factors such as the size of the company, the length of the listing, the financial status, and the complexity of the business operations. Bardhan et al. (2015) studied the relationship between the characteristics of family business and non-family business and the quality of internal control of financial reporting [
Based on the subjective judgment of the evaluator and the internal control evaluation of the pure mathematical model. Early internal control studies have shown that personal judgment and professional experience have a significant impact on internal control evaluation, so the evaluation of internal control is mostly based on this (Robert, 1974; Robert and Kramer, 1980; Robert and Kramer, 1980; Hamilton and Wright, 1982), the evaluation results are more subjective because there are no clear evaluation methods or systems available. In order to avoid the excessive subjectivity of internal control evaluation, many scholars have proposed different improvement methods. Yu and Neter (1973) established a stochastic model that allows auditors to objectively evaluate the reliability of internal control systems in quantitative terms. Robert and William (1982) added new indicators such as stability and related weights to reduce subjectivity, and combined with the relationship between auditors’ practice experience and personal judgment to achieve the objective of improving the internal control evaluation method or system. Donald (1983) used a working paper obtained from an office performing an audit task in conjunction with discriminant analysis (i.e., multivariate statistical analysis) to construct a descriptive internal control basic evaluation. Richard. H. Tabor (1983) selected 109 listed companies audited by the “Big Four” accounting firms as research samples, using the evidence collected during the research process and the data provided by the “Big Four” accounting firms. Study the correlation between the internal control evaluation of listed companies and the sample size of substantive procedures. John and James (1983) propose a fuzzy set model that summarizes internal control judgments. Srivastav (1985) constructs a theoretical model for evaluating internal control, and proposes three criteria for the effectiveness of internal control: the probability that the control program (procedure) is executed, the probability of making correct decisions on the correct input information, and the input error information, the probability of making the right decision. Johnson et al. (1986) studied computer control as a primary method for internal control evaluation. Rayman et al. (1986) constructed a computational model examining the internal control
Influencing factor | Research scholar |
---|---|
Internal Audit | Lin et al. (2001) and Krishnan (2005) |
Factors such as company size, length of listing, financial status, complexity of business operations, etc. | Doyle et al. (2007), Kharraz et al. (2017) |
Family factor | Bardhan et al. (2015) |
Overconfidence, CEO’s cognitive bias | Lee (2016) |
External Audit | Anantharaman et al. (2016) |
process to evaluate internal controls. Purivs (1989) proposed three methods for evaluating internal control: text narrative, questionnaire, and flow chart. Mahamad (1993) proposed a model to describe the structure and evaluate internal controls. Bierstaker et al. (2002) used empirical research methods to examine auditors’ internal control evaluation behaviors and found that they used questionnaires more effectively than textual descriptions when identifying internal control design flaws.
The internal control model proposed by the above scholars does not need to rely too much on the subjective judgment of the evaluator, or is too purely physics and physics, resulting in the lack of practical proxy variables in the actual application, the model hypothesis is difficult to accept and the cost of use is relatively high. In advanced situations, they are not widely adopted in practice. However, it laid the foundation for the follow-up researchers to continue to study and construct a scientific and reasonable internal control evaluation system.
In the United States, the COSO Committee released the landmark “Internal Control-Integration Framework” in 1992. After several years of establishing an internal control framework to evaluate and evaluate the internal control status of enterprises, it has become a new research hotspot. It integrates the various concepts and interpretations of internal control that exist in reality, and provides a reference standard for enterprises to evaluate the effectiveness of their internal control systems. After the Enron incident in 2002, in order to restore the confidence of US investors in the capital market, the US Congress and the government accelerated the adoption of the Sarbanes-Oxley Act (SOX Act). After the release of the Internal Control-Integration Framework, foreign scholars have evaluated internal control from the following aspects: one is based on the major defects published by the accounting firm as the basis for evaluation; the other is the internal control information that the enterprise voluntarily discloses. The evaluation basis; the third is the basis of internal control as the evaluation basis; the fourth is based on the five elements of internal control.
1) Based on the major defects published by the accounting firm as the basis for evaluation. SOX Acts 302 and 404 require listed companies not only to disclose internal control reports in their periodic reports, but also to self-evaluate the effectiveness of internal controls, and external auditors must also provide internal control visa reports, i.e., the company must disclose the substance. Major flaws in the internal control of sexual content. Li Xiang (2009) believes that the flaw in internal control is a sign that the internal control of the company (financial report) is ineffective and risky, and it is regarded as a senior manager’s dereliction of duty in internal control. Some scholars have done a lot of empirical research on the influencing factors and economic consequences of internal control defects and found that the size of the company, the time of its establishment, the complexity of its operating status, the recent changes in organizational structure, the disclosed accounting risks, profitability, In addition to corporate internal factors such as corporate governance, investor protection, different systems, and different cultures can have a significant impact on corporate internal controls (Ashbaugh-Skaife et al., 2007, 2008; Loeone, 2007; Doyle et al., 2007a, 2007b; Zhang, 2007; Engel et al., 2007; Leuz et al., 2007, 2008; Naicer and Sharma, 2009; Li et al., 2010; Costello and Wittenberg-Moerman, 2011, etc.). Ashbaugh, Collins and Kinney (ACK), Doyle, Ge, and McVay (DGM) provided evidence of the first factors related to internal control deficiencies (ICDs) that led to company disclosure under SOX Acts 302 and 404, Leone (2007) After summarizing the research, it lists the indicators that may lead to internal control deficiencies and believes that these studies will lay the foundation for future research on internal control deficiencies (ICDs).
2) The internal control information that the company voluntarily disclosed is used as the evaluation basis. Botosan (1997) based on the information disclosed by 122 manufacturing companies on a voluntary basis, combined with the company report ranking of The Association for Investment Management and Research (AIMR), constructed the company’s Disclosure Level Index (DSCORE) and empirically examined the company’s disclosures. The impact of the level on the cost of equity capital of the company is the earliest study to use the quantitative means to construct the company’s disclosure level. Many scholars have extended the research on the internal control disclosure index.
3) The objective of internal control is used as the basis for evaluation. Based on COSO’s Enterprise Risk Management-Integration Framework, Chil-Yang Tseng (2007) built a risk management index based on strategic, operational, reporting, and compliance objectives [
4) Based on the five elements of internal control. EI Paso (2002) constructed the internal control evaluation model from the five elements of the COSO report, which consists of two levels. The first level is the five elements of internal control, the second level is the specific indicator for measuring the five elements, and the control environment is 43. 12 evaluations, 10 control activities, 14 information communication, and 14 monitoring activities formed a questionnaire containing 93 specific indicators, and self-evaluated internal control through questionnaire survey of company employees. Lembi Noorvee (2006) established four first-level indicators based on the COSO Report (1992), namely control environment, risk assessment, information and communication and monitoring, and second-level indicators under the first-level indicators, including 7 control environments. 3 risk assessments, 5 information and communication, 3 monitoring activities, and a total of 18 secondary indicators. Based on the five elements of COSO (1992), Schwartz (2006) designed an internal control evaluation model based on business process integration for small listed companies. There are five steps, and each step has a corresponding evaluation template. The internal control can be evaluated according to its own situation and the evaluation template. Chen et al. (2017) developed an internal control index based on the internal control index to evaluate the internal control of Chinese listed companies, and used AHP to quantify the internal control of listed companies and verified the relationship between internal control quality and earnings management. The relationship validates the validity of the index and finds that the higher the quality of internal control, the higher the credibility of the company’s financial reporting.
In summary, in recent years, there have been relatively few studies on the internal control of SMEs in foreign countries. The existing research on the influencing factors of internal control, economic consequences and internal control evaluation provides reference for the follow-up researchers to conduct internal control construction and internal control evaluation.
China’s regulatory authorities have drawn on the experience of the United States to introduce a series of policy norms on internal control. In 2006, the “Guidelines for Internal Control of Listed Companies” issued by the Shanghai and Shenzhen Stock Exchanges and the “Basic Standards for Internal Control of Enterprises” issued by the Ministry of Finance and other ministries in June 2008 required listed companies to disclose internal control self-evaluation and hire intermediaries. The accounting firm conducts an evaluation review. The introduction of these policy norms has made academic and practical circles increasingly concerned about internal control.
Li Wanfu et al. (2011) examined the role of internal control in corporate investment and found that lower internal control quality exacerbates the company’s inefficient investment, including over-investment and under-investment [
Zhang Ying and Zheng Hongtao (2010) found that the more effective internal audits, the lower the probability of corporate irregularities [
1) Research on the index system of general internal control evaluation system
Summarizing the research ideas of domestic scholars, the methods of constructing the internal control evaluation index mainly include the combination of “element view”, “object view”, “factor view” and “object view”, “elemental view.” Wang Yuyu and Wen Tao (2005) constructed an internal control evaluation index system consisting of 35 specific indicators from five aspects: internal control environment, risk assessment, internal accounting control, internal management control and supervision and control [
Influencing factor | Research scholar |
---|---|
Internal Audit | Zhang Ying and ZhengHongtao (2010), Xiang Rui et al. (2017) |
Nature of business | Liu Qiliang et al. (2012), Liu Yunguo, etc. (2016) |
Management’s emphasis | Zhang Jide et al. (2013), Chi Guohua, etc. (2014) |
culture | Cheng Bo et al. (2016) |
of the overall operation of the system. Relationships, and this method also needs to rely on the experience of the reviewers to make the evaluation conclusions lack of objectivity (Zhang Zhaoguo et al., 2011) [
2) “Target view.” Li Yuhong (2011) built an internal control index based on strategic goals, business objectives, financial reporting reliability goals and compliance objectives, but the index did not take asset security into account, and the article did not combine qualitative and quantitative, so it was constructed. The internal control index does not fully reflect the level of internal control of the firm [
3) “Target view” combined with “factor view”. Han Chuanmo and Wang Shiguo (2009) constructed an internal control evaluation index system from three dimensions. The first dimension is the goal dimension, that is, realizing the enterprise development strategy, improving operational efficiency and effectiveness (including asset security), financial report and related information. The four objectives of legal compliance of business management; the second dimension is the control element dimension, including internal environment, risk assessment, control activities, information communication and internal supervision; the third dimension is organizational dimension, including subsidiary layer, The business unit level, the branch level and the company’s overall level are four levels, and then the various control measures are scored by the fuzzy evaluation method, and finally the overall score of the internal control of the enterprise is determined [
In summary, similar to the research situation in foreign countries, in recent years, there have been many studies on the internal control of listed companies in China, and there are relatively few studies on the internal control of SMEs. Researches on internal control factors, economic consequences and internal control evaluations at home and abroad have provided reference for domestic follow-up researchers to conduct internal control construction and internal control evaluation.
From the above literature review at home and abroad, it can be seen that domestic and foreign scholars’ research on internal control is mostly based on listed companies, while listed companies are generally large and medium-sized enterprises. Research on internal control of small enterprises is rare less. The proportion of small enterprises in enterprises is a major driving force for China’s economic growth. However, today, there are the following problems in the internal control construction of small enterprises in China: the managers of small enterprises fail to correctly recognize the importance of internal control; the internal control system is imperfect; the integration of personnel is responsible for implementing and supervising internal control construction. The quality is not high. The existence of these problems makes it difficult for internal control to function properly. High-quality internal control helps to improve the management and risk prevention capabilities of small businesses and promote their healthy and sustainable development. In order to improve the internal control level of small enterprises, this paper believes that the following points should be achieved: managers should correctly recognize the importance of internal control; improve the internal control system based on the five elements of COSO’s internal control; the scientific and reasonable internal control evaluation system supervises the internal control of small enterprises. Therefore, in the future research of internal control in China, the research on the internal control construction of small enterprises and the internal control evaluation of small enterprises is a research field with practical value and theoretical value.
The research contribution of this paper is to sort out the related research of internal control, and provide the follow-up researchers with the fields that need further research in internal control.
The shortcoming of this paper is that it does not analyze in detail which factors will affect the development of internal control construction of small enterprises, and the factors that should be considered when conducting internal control evaluation of small enterprises. This needs to be further improved and expanded in the future.
The author declares no conflicts of interest regarding the publication of this paper.
Qin, C.H. (2018) Literature Review and Prospect of Enterprise Internal Control. American Journal of Industrial and Business Management, 8, 2120-2132. https://doi.org/10.4236/ajibm.2018.810140