内部控制中英文文献.doc

Appendix：
Disclosure on Internal Control Systems
As a Substitute of Alternative Governance Mechanisms
According to agency theory, various governance mechanisms reduce the agency problem between investors and management (Jensen and Meckling, 1976; Gillan, 2006). Traditionally, governance mechanisms have been identified as internal or external. Internal mechanisms include the board of directors, its role, structure and composition (Fama, 1980; Fama and Jensen, 1983), managerial share ownership (Jensen and Meckling, 1976) and incentives, the supervisory role played by large shareholders (Demsetz and Lehn, 1985), the internal control system (Bushman and Smith, 2001), bylaw and charter provisions (anti-takeover measures) and the use of debt financing (Jensen, 1993). External control is exerted by the market for corporate control (Grossman and Hart, 1980), the managerial labor market (Fama, 1980) and the product market (Hart, 1983).
After the various financial scandals that have shaken investors worldwide, corporate governance best practices have stressed in particular the key role played by the internal control system (ICS) in the governance of the firm. Internal control systems contribute to the protection of investors’ interests both by promoting and giving assurance on the reliability of financial reporting, and by addressing the boards’ attention on the timely identification, evaluation and management of risks that may compromise the attainment of corporate goals. These functions have been widely recognized by the most diffused frameworks for the design of ICS that have stated the centrality of internal control systems in providing reasonable assurance to investors regarding the achievement of objectives concerning the effectiveness and efficiency of operations, the reliability of financial reporting and the compliance with laws and regulations (COSO, 1992; 2004).
Notwithstanding their relevance, investors cannot directly observe ICSs and therefore cannot get information on their design and functioning because they are internal mechanisms, activities and processes put in place within the organization (Deumes and Knechel, 2008).
As investors take into account the costs they sustain to monitor management when pricing their claims (Jensen and Meckling 1976), management have incentives to communicate information on the characteristics of the ICS in order to inform investors on the effectiveness of ICS when other monitoring mechanisms (the ownership structure of the firm and the board of directors) are weak, and thereby providing them with the convenient level of monitoring (Leftwich et al., 1981). The possible existence of substitution among different mechanisms has been debated in corporate governance literature (Rediker and Seth, 1995; Fernandez and Arrondo, 2005) based on Williamson’s (1983) substitute hypothesis, which argues that the marginal role of a particular control mechanism depends upon its relative importance in the governance system of the firm.
In this paper, we contend that disclosure on the characteristics of ICS is a relevant alternative governance mechanism in the monitoring package selected by the management. According to Leftwich et al. (1981) “managers select a monitoring package, and the composition of the chosen package depends on the costs and benefits of the various monitoring devices” (p. 59).
In particular, we focus particular on the relationship between ICS disclosure and two other mechanisms of the monitoring package ( the ownership structure of the firm and the board of directors) that according to literature (Jensen and Meckling, 1976; Fernandez and Arrondo,2005; Gillan, 2006) play a relevant role in monitoring management’s behavior. We posit that incentives for reporting on the characteristics of ICS depend on the supervisory role played by the firms’ ownership structure and board of directors
We therefore examine the contents and extent of ICS disclosure of 160 European firms listed in four different stock exchanges (London, Paris, Frankfurt and Milan) on a three-year period (2003 – 2005). By using this international sample, we are able to the depict some features of different institutional environments.
We find evidence that disclosure on ICS is a substitute for the monitoring role played by other governance mechanisms as ownership concentration, institutional ownership, the proportion of independent directors sitting on the board and the proportion of accounting expert members on the audit committee.
We add to previous literature on the governance role played by disclosure on ICS by adopting a complete disclosure framework that allows us to consider in detail the content and extent of information the management discretionarily communicates on the ICS of the firm. While corporate governance best practices ask for the disclosure on the characteristics of the ICS, they do not provide instructions on what management should disclose and on the extent of such disclosure. Such lack of instructions leaves management with a discretionary choice on the narrative content of ICS disclosure.
This paper offers empirical support for Williamson’s (1983) substitute hypothesis among different governance mechanisms and it has relevant policy implications. While most corporate governance studies consider disclosure as a complementary mechanism management adopts to reinforce the governance system of the firm (Chen and Jaggi, 2000; Eng and Mak, 2003; Barako et al., 2006) and indeed provide contrasting results, in this study we show that disclosure on ICS substitutes for other governance mechanisms. This means that not necessarily better governance implies greater transparency and disclosure. Firms adhere to corporate governance best practices by disclosing information on the ICS and such disclosure is more extensive when investors need more assurance about the protection of their interests, when other governance mechanisms are weak. On the other side, when the governance system is sound, management have less incentives to extensively disclose information on the ICS, as this is a costly activity and its benefits are overwhelmed by the other governance mechanisms.
The evidence provided by the empirical research has important policy implications, because it offers insights to firms and practitioners on the relevance of disclosure on internal control systems as a monitoring mechanism for investors. The remainder of the paper is structured as follows. The next section reviews the theoretical background and develops the research hypotheses. The research method is described in section 3, followed by results discussed in section 4. Concluding remarks are presented in the last section.
Theoretical Background and Hypotheses Development
According to corporate governance literature, the main internal monitoring mechanisms are the board of directors, the ownership structure of the firm, and the internal control system (Gillan, 2006). In particular, ICSs play a central role in the protection of investors’ interests both assuring the reliability of financial reporting and promoting the timely identification, assessment and management of relevant risks that encumber upon the business. The centrality of ICS in corporate governance has been widely recognized by the vast majority of codes of best practice1.
In order to express their concerns and price their claims, investors need to get information on the design and functioning of monitoring mechanisms. In the cases of mechanisms like the ownership structure and the board of directors, information concerning structure and composition, type and composition of committees in place, number of meetings and so on, is publicly available. In some other cases, the enforcement of reporting on ICS weaknesses or material deficiencies – like those required by the SOX - provide investors with relevant information about possible gaps in the functioning of the ICS (Leone, 2007).
Nevertheless, specific information on the characteristics of the ICS is indeed more difficult and expensive to gather because ICSs are complex sets of activities and processes carried out internally to the firm (Deumes and Knechel, 2008; Bronson et al., 2006). Indeed, while corporate governance best practices require to disclose information on the ICS, they do not provide instruction on the narrative contents of ICS disclosure. Therefore, investors are unlikely to be informed about the nature, extent, processes and quality of internal controls, unless disclosure on the characteristics of the ICS is provided by the management. The content and extent of such disclosure will depend on the existing monitoring package (Leftwich et al., 1981; Williamson, 1983) of the firm.
At the best of our knowledge, disclosure on the specific characteristics and functioning of ICS has been deserved poor attention. While the introduction of the SOX in the USA, and the related requirement for disclosure on ICS deficiencies or material weaknesses has increasingly attracted academic interest in recent times (among the others see Ash Baugh et al., 2007; Doyle et al., 2007; Leone, 2007), only few studies focused on the specific characteristics of ICS disclosure.
Bronson et al. (2006) examine firm characteristics associated to disclosure on ICS before it was made mandatory by SOX. They find a positive association between the likelihood of issuing a management report on internal control and corporate governance variables like the number of audit committee meetings and the percentage of institutional shareholders. Deumes and Knechel (2008) identify a list of six disclosure items that capture the ICS information generally available in the annual reports of firms analyzed. They find that the disclosure index on ICS is significantly associated to variables that proxy for the agency costs of equity and with variables that proxy for agency costs of debt.
According to our theoretical framework, if disclosure on ICS acts as an alternative governance mechanism, when the pricing of claims is high (Jensen and Meckling, 1976) -due to the fact that the other various monitoring devices already in place are not effective enough to limit the costs of the agency relationship - we expect that disclosure on ICS acts as substitute for other monitoring mechanisms in order to reduce the overall intensity of agency conflicts (Williamson, 1983, Fernandez and Arrondo, 2005).
In order to test this hypothesis, we focus on two fundamental elements of the monitoring package, besides the disclosure on ICS: the ownership structure and the board of directors. Corporate governance studies identify three proxies for the supervisory role of the ownership structure: i) the supervisory role of large investors, ii) the monitoring role of institutional investors and iii) the alignment effect of managerial ownership. We expect that the incentives for management to disclose information on the firm’s ICS will be higher for those firms where the monitoring role played by the owners is weaker.
Literature and empirical evidences attribute to large shareholders a key supervisory role. Kang and Shivdasani (1995) detected a positive association between the presence of large shareholders and management’s turnover in underperforming firms. On the other side, a disperse ownership is usually associated to a lower monitoring ability and greater information symmetries (Shleifer and Vishny, 1986; Zeckhauser and Pound, 1990; Barako et al. 2006).Alternatively said, the direct supervision performed by large shareholders reduces the need for alternative monitoring mechanisms. Consequently, we expect that incentives to disclose on ICS are higher when the ownership is diffused.
Institutional investors also play a relevant supervisory role. While individual investors in public firms have little incentive to monitor management as they are exposed to private costs against which there are public benefits (Grossman and Hart, 1980), institutional investors have higher incentives to play an active monitoring role on the management because of their large voting power (Milgrom and Roberts, 1992). Moreover, institutional investors can access to management through privileged information channels, in order to get disclosure on the firm’s operations (Schadewitz and Blevins, 1998). Thus we expect that in presence of institutional investors, management have lower incentives to disclose on ICS.
The last proxy for the supervisory role of the ownership structure is the managerial ownership. It is generally accepted that management’s stock ownership contributes to the alignment of managerial and shareholders’ interests (Jensen and Meckling, 1976; Bronson etal., 2006; Deumes and Knechel, 2008), thus reducing the agency conflicts inside the firm (Eng and Mak, 2003; Fernandez and Arrondo, 2005 Cheng and Courtenay, 2006). As managerial stock ownership reduces the need for monitoring, we expect that incentives to disclose on ICS are higher when the level of managerial ownership is lower.
Boards of directors play a crucial role in monitoring management as shareholders delegate to them the power to control managerial decisions. Previous literature (Carcelo and Neal, 2000;Fernandez and Arrondo, 2005; Krishan, 2005) identifies different proxies for the capability of the board to monitor managerial behavior : i) the proportion of independent directors, ii) the presence of CEO duality, iii) the presence of accounting experts and iv) the monitoring ability of the audit committee. We expect that the more powerful the monitoring role of the board of directors, the lower the incentives for management to disclose information on ICS. Independent directors are expected to monitor the activities of the board and to limit managerial opportunism (Fama, 1980; Fama and Jensen, 1983). Empirical evidences support this expectation. Rosenstein and Wyatt (1990) explain the positive stock price effects associated to the appointment of a new independent director in terms of positive reaction signals of the markets to the monitoring role played by the outsiders. A number of studies document a positive relationship between the proportion of independent directors on the board and firms’ performance (Baysinger and Butler, 1985; Goodstein and Boeker, 1991; Pearce and Zahra, 1992): the proportion of independent directors of the board is considered a proxy of the capability of the board to control managerial actions (Fernandez and Arrondo, 2005) thus supporting a positive association between the proportion of independent members of the board and effectiveness of their monitoring role. Therefore, we expect that the higher the presence of independent directors, the lower incentives for management to voluntarily disclose on ICS.

-- Sergio Beretta. Disclosure on Internal Control Systems-As a Substitute of Alternative Governance Mechanisms, Bocconi University，Press.2009.

附录：
内部控制系统披露—一种可替代的管理机制
根据代理理论