Disclosure of Internal Control Information by Chinese Cross Listed Companies

Abstract

This study examines the internal control disclosures mandated for Chinese cross-listed companies in 2011. These were the first Chinese companies required to comply with the Basic Standards of Enterprise Internal Control. The study documents the level of compliance with the requirements, analyses the nature of the internal control weaknesses, and examines the quality of disclosures. The study also examines differences in characteristics between firms that report internal weaknesses and those that do not. Using descriptive statistics this study found a high degree of compliance from Chinese cross-listed companies in disclosing internal control information in accordance with the regulations. However,the analysis shows that there is some inconsistency in the application of the requirements, especially with regard to disclosures relating to internal control deficiencies, identification criteria and improving internal controls. The disclosures lack detail as to the number and nature of internal control weaknesses and often only provide generic statements on corrective measures. Firms with internal control weaknesses were less likely to have a Big 4 auditor. This study contributes to the research literature in respect of the compliance with disclosure standards for internal control weaknesses in China and the quality of internal control reporting of Chinese cross-listing companies.