Origin of internal control theory (1)

Abstract: As an enterprise management system, a subsystem --- internal control, its produce has experienced two stages of development and perfection. Through its history, can be found in the emergence and development of internal control has its deep roots, namely: economic causes and social causes.

     Keywords: Internal control; control environment; risk assessment; control activities

     1, internal control emergence and development of the history of back

     The 20th century, 40 years later, the internal control practice and theory of a wide range of applications and rapid development, internal control over the content of the completion of its main building, its constituent elements and control measures can be seen scattered, scattered all their management systems and practice, but did not sum up the theory to the management of internal control as a subsidiary. 1949 united states Institute of Chartered Accountants of the audit procedures the Commission, "internal control, an element of the Harmonized System and its implications for the management and the importance of an independent certified public accountant," a special report, acknowledged that the internal controls and financial sectors beyond the matters directly related. In October 1958, the Commission issued Notice No. 29 of the audit process, "the independent auditors the scope of evaluation of internal control," re-defining of the internal controls were expressed, the internal control is divided into internal accounting controls and internal management controls two types of . Beginning of the 20th century, 80 years later, the theoretical study of internal control, there has been new progress in the Western academic theory on the internal control studies, has been recognized that the internal accounting control and internal management control of the indivisibility and interrelatedness of , but the focus gradually from the ordinary meaning to the specific content of deepening. This change is marked in April 1988 AICPA issued a "Notice Auditing Standards No. 55", provided from January 1990 onwards to replace the 1972 statement "issued by Auditing Standard No. 1." The notice of the promulgation and implementation of internal control theory research breakthroughs, it is the first time, "internal control structure," replacing the word "internal control." Pointed out: "the enterprise's internal control structure, including specific targets for the provision of reasonable assurance companies established policies and procedures." And clearly explains the three elements of the internal control structure, namely the control environment, accounting system, control procedures and their specific content. The 20th century, 90 years later, by the American Accounting Association, Institute of Chartered Accountants, the International Association of internal audit staff involved in such organizations as the "Committee of Sponsoring Organizations" (referred to as COSO) released a report, "--- the overall framework of internal control." In 1996 the United States Institute of Chartered Accountants issued the "Notice Auditing Standards No. 78", fully accepted the COSO contents of the report, and from January 1997 onwards to replace the 1988 "issued by Auditing Standards Bulletin No. 55." Notice that internal control is a corporate board of directors, management and other personnel to achieve process. Is designed to achieve operational effectiveness and efficiency of the reliability of financial reporting, in accordance with applicable laws and regulations to ensure such goals. The internal control structure is divided into the control environment, risk assessment, control activities, information and communication, and supervision five elements.

     Throughout the emergence and development of internal controls trajectory of history, its theory and the evolution of the concept by its very nature, can be divided into two stages, namely the formation phase and the development and satisfactory. The 20th century, 80 years ago, the people's understanding of internal control within the constraints derived from the theoretical assumption that the characteristics of this stage are: within the company formed a relatively systematic internal controls, procedures and methods, and basically formed a business process technology, the business division of standardization, employees institutionalized inter-agency collaboration and constraints, as well as business objectives associated with the theory of the pattern. On the other hand, we can see that this theory is that the internal accounting controls mainly focus on how a variety of measures error correction, so that the internal control in the face of the real time enterprise management seems too negative and narrow. In view of this, the 20th century, 80 years later, by the systems theory, control theory, the impact of theories, as well as 90 years of information industry and the impact of the rise of high-risk industries, academia, the study of internal controls major changes have taken place, specifically manifested as internal control structure and the overall framework of internal control two viewpoints. Despite the existence of some differences between the two, but the theoretical characteristics of this phase reflects the people's internal controls with a focus on the transfer, that is, step by step from the general to the specific depth, and internal control "elements" and reflects the internal locus of control in the management mode of operation and management of the process of combining features.

     Second, internal control theory, the root causes of the formation and development of

     (A) control theory, information theory and systems theory and other scientific theories is the enterprise internal control methodology established

     40 years since the 20th century, especially after the end of World War II, the rapid development of science and technology has caused an unprecedented increase in production technology, which resulted in the production of rapid growth. On one hand, in large numbers, forming a cross-regional economic monopolies; the other hand, due to expansion of firm size, the internal functional departments to increase, but also need to be coordinated within the enterprise to achieve saving resources, prevent errors and fraud, and improve operational efficiency of business objectives. Therefore, objectively requires enterprises to establish, including organizational structure, business processes, etc., self-control and self-adjustment mechanism. At a time when the control theory, information theory and systems theory such as the formation of the natural sciences just as the establishment of internal controls to provide a theoretical and practical support. On the control theory is concerned, it is a study of elements from a variety of coupled systems of regulation and control of the general laws of science, particularly in the economic process is based on research systems and how to play their functions, how to control the economic process for the purpose of economic control theory, to become one of the theoretical basis of internal control. This is because the internal control theory in the study of each specific organization's internal management processes, research each unit how to play their proper management functions and how to effectively regulate the process of management and control of established self-regulation, self-control mechanism and control the ways and means, it is in accordance with the general principles of cybernetics. Resulting from the late 20th century, 40 of the information theory is the theoretical basis for internal control. From the point of view of information theory, control is essentially a through collection, screening, processing, transmission, the process of feedback to guide the logistics and cash flow, according to the intended target to run an effective control mechanism, where information is controlled by the source and basis. Its authenticity, timeliness is a key to the effectiveness of internal control factors. Systems theory was born, not only in the areas of natural and social sciences to bear the rich fruits, but also brings new ideas and concepts, caused great changes in management practices. In accordance with this theory point of view, the enterprise as an interconnected and interdependent system composed of a number of elements, while the internal control is the management system of a subsystem. Reposted elsewhere in the paper for free download http://eng.hi138.com


(B) the principal-agent theory is the theoretical development and improvement of internal controls underlying causes of

     According to principal-agent theory to analyze the areas covered by its major research enterprise as a contractual relationship. In this contract, the agent according to the client's commission, within the scope of its mandate, to an agent in the name of the corresponding activities. From this theory, the reality of the formation of the background can be seen that the completion of primitive accumulation of capital, companies shift from individual owners to the form of partnership, and eventually corporate form, is the commission agent --- the source of this problem arise; production socialization higher levels of capital and operating functions of the high degree of concentration of highly specialized to create the conditions for their produce; company expanding production scale, diversification of investment entities, as well as the right of property ownership and operation of separation, is the ultimate form of the theory underlying reasons. From the enterprise's overall development trends and the effect of the actual operation point of view, the highest corporate enterprise is a form of enterprise organization, that is, investors or shareholders to the right of the business activities of enterprise assets by the Business Management commitment, property ownership and management rights, in particular as they relate to the separation of control, so that commissioning agency relationship exists --- inevitable. Can be seen by enterprises as a stakeholder organization composed of contract is a mixture of commission --- a collection agency relationship, to enable business continuity and steady way, establish and improve an effective system of internal controls to address adverse selection and the moral hazard problem of the internal mechanism. The practice of internal controls also confirmed by principal-agent theory is its development and improvement of the underlying root causes.

     (C) changes in audit approach and audit staff to enhance the legal responsibility of the development of internal control theory propeller

     Early stage of development in the audit, the audit would typically take a detailed review of all the detailed examination of corporate accounting documents, calculate reviewing all account balances, for account card, account checking account. However, with the growing scale of business, business activities and the increasingly complicated, and no doubt the traditional audit approach in the formation of a great challenge, therefore the audit sampling methods have come into being. Sampling auditing methods used, to a certain extent, eased the growing number of audit assignments brought it difficult to conduct a detailed audit of the problem, but brought subjective judgments as auditors of the audit findings formed the reality of declining credibility. In addition, as noted earlier, in the case of separation of ownership and enterprise net assets of the owners (investors and creditors) urgently requires companies to provide true and reliable management information. To this end, many countries, up from the level of laws and regulations and urge enterprises to pay more attention to the external auditors review of internal controls, a series of cases of the occurrence and the promulgation of the Act, in enhancing the legal responsibility of the auditors, but also enable enterprises focus on their own internal control building of the system to minimize the CPA refused to accept the commission audit or the reservation of audit opinion.

     (D) The Government is a key driver for the development of internal controls

     From the actual development of the internal control situation, the reason why so quickly, in addition to internal management requirements of a number of factors, the Government is to promote its development as a major external forces. The 20th century, 70 to 80 years, the U.S. government through a series of measures to promote the implementation of internal controls. Such as the 1977 "Anti-Foreign Corrupt Practices Act," which stipulated that each enterprise should establish internal control systems; the United States for the emergence of some 80 years of financial reporting and corporate fraud "sudden" bankruptcy case, causing some members of Congress on the financial report raised questions about the system, which is one concern, is a listed company's internal control adequacy. To this end, set up a "Treadway Commission." One of the goals of the Committee is to increase internal control standards and guidelines, the results of their work became known as the COSO report. From the contents of the report point of view, both on the past, has amended the definition of internal controls, but also for the design of more extensive guidance on internal control systems. My Government in December 1996 by the Ministry of Finance issued the "independent audit specific criteria No. 9 --- internal control and audit risk", as well as the May 1997 Bank of China promulgated "to strengthen financial institutions, the guiding principles of internal control "and a series of regulations and notifications, in promoting the practice of building enterprises to strengthen internal controls, while also greatly promoted the development and improvement of internal control theory process.


     [1] Gao Jian-bing. Principal-agent relationship with the accounting control of the Discussion on the [J]. Accounting issue, 2000 (4).

     [2] Ma Chongming, Jia. Modern control theory and practice within the enterprise development and improvement of [J]. Contemporary Finance & Economics, 2000 (12).

     [3] Shi Jin-ping. Modern enterprise principal-agent [J]. Economic History, 2000 (2).

     [4] Ng Shui Peng, Hon-Man Chan, Shao Xian-di. On the improvement of our internal control [J]. Accounting Research, 2000 (9).

     [5] Li Fengming, HAN Xiao-mei. Historical Evolution of internal control theory and future prospects [J]. Audit and Economic Research, 2001 (7).

     [6] Xiao-Rong Zhou. China's Theory and Practice of Internal Control [J]. Financial Theory and Practice, 2002 (7).

     [7] Ng Shui Peng, Hon-Man Chan, Shao Xian-di. The development of internal control theory and Revelation [J]. Accounting Research, 2003,5 (2).

     [8] Li Fengming. Internal Control Studies [M]. Beijing: Peking University Press, 2002.

     [9] Wang set. Internal Control System Design [M]. Beijing: Enterprise Management Publishing House, 2001. Reposted elsewhere in the paper for free download http://eng.hi138.com


Management Theory Papers