Characteristics of firms with effective internal control: evidence from Chinese companies

Abstract

We define the effectiveness of internal control as effectiveness of internal control over compliance, effectiveness of internal control over reporting, effectiveness of internal control over operation. Based on a sample of 154 Chinese firms, we found that firms with effective internal control over compliance as well as over reporting are, on average, larger, financially stronger and older (it only in reporting case) than those with ineffective internal control. We also found that firms with effective internal control over compliance as well as over reporting as are more likely with more decentralized ownership, with more centralized management mode, with stronger enterprise culture and better management philosophy and at maturity state (it only in compliance case). Firms with effective internal control over operation are, on average, larger, older and financially stronger. They are more likely with more centralized management mode, with weaker control power of largest shareholder, with stronger enterprise culture and better management philosophy.