Abstract
Based on examining links and differences between internal control and risk management from their definition,this paper mainly analyzes their relation with game theory. A complete information static game model isestablished and payoff functions for managers and investors are designed. The result shows that the decrease ofbusiness risk cannot be realized by severe penalties, instead, the frequency of internal control in risk monitoringmust be taken into consideration, and otherwise it will stimulate enterprise risk monitoring paradox. It is aneffective way for enterprises to reduce risk by lowering the cost of internal control in risk monitoring andimproving the ability of risk prevention.
Highlights
In 1992, COSO issued the reports "Internal Control - Integrated Framework” (IC framework), which was supplemented in 1994
In order to achieve the effectiveness of interal control, IC framework indicates that five components, including control environment, risk assessment, control activities, information and communication, and monitoring are needed
ERM framework notes that internal control is an integral part of enterprise risk management and states that the components of enterprise risk management include internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring
Summary
In 1992, COSO (the Committee of Sponsoring Organization) issued the reports "Internal Control - Integrated Framework” (IC framework), which was supplemented in 1994. ERM framework notes that internal control is an integral part of enterprise risk management and states that the components of enterprise risk management include internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. Many extra-large financial frauds and management failure cases occured after entering the new century, such as Enron and WorldCom in the United States, Kanebo and Seibu Railway in Japan, Sanjiu and Yili in China The failure of these cases can be summarized as follows: (1) loose internal controls in financial management; (2) non-normal rent-seeking behavior (i.e., diversified investments) that failed to be effectively checked; (3) serious liabilities caused by excessive over-investment. Baesd on the results of game analysis, the last part of the paper presents implications to implementation of internal control monitoring
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