Abstract:
This study examines the relationship between individual characteristics of board members and internal control weaknesses using data from Chinese listed firms from 2007 to 2013. China’s first internal control regulation (2008) (“China SOX”) stipulates that the board of directors takes the main responsibility for the establishment and implementation of internal control, an approach which is different from US SOX. I examine whether or not individual characteristics of board members are related to internal control weaknesses and, if so, how does this happen. I address this issue by examining the influences of education, training, experience, certification and integrity of board members on specific internal control weaknesses and weakness remediation. In particular, given the vital role of the board chairman in Chinese internal control, I also study the association between individual characteristics of the board chairmen and internal control weaknesses. In addition, I expect that the nature of dominant shareholders (state-owned or non-state owned) and the board behaviour (independence and diligence) have an influence on the correlation between the board and internal control. I use a sample of firms with internal control problems and, based on size, industry and ownership, match these firms to a sample of control firms without internal control problems. I also conduct a series of additional tests. Results indicate that individual characteristics of board members including education, experience, certification and integrity, are related to internal control deficiencies. However, relevant training has no relationship with internal control. Results also show that individual characteristics of board chairmen are related to internal control problems. The overall results demonstrate that internal control quality is better, internal control weaknesses are reduced and weakness remediation is more likely to be applied in firms in which board members and board chairpersons have stronger qualifications. However, board behaviour and ownership nature do not influence the relationship between board members and internal control. Thus, it is suggested, board characteristics and internal control are directly linked. My findings prove reliable throughout several sensitivity examinations. It is useful for directors to know that some characteristics (education, experience, certification and integrity) of board members do make a difference.