Internal control effectiveness and the associated characteristics ofU.S. listed Chinese firms

Abstract



A recent and rapid increase in U.S. listed Chinese firms has occurred since the 1990’s, with at least 495 firms attempting to raise capital on U.S. listing boards. This means of fundraising has allowed investors to participate in the opportunities provided by China’s growth, while enjoying the perceived benefits of the U.S. regulatory oversight. One such regulatory requirement is compliance with the provisions of the Sarbanes Oxley Act of 2002, which is largely focused on the internal controls of publically listed firms.

This study examines the internal control effectiveness and associated characteristics of 198 U.S. listed Chinese firms, for the fiscal year 2009. With the use of Sarbanes Oxley Section 302 data, this study provides support for a number of previous studies and contributes new findings to the academic literature relating to audit committee financial expertise and CEO duality. This study also provides interesting findings regarding the impact of regulatory environments, when the sample listing type is divided into direct listed firms and cross listed firms.

Specifically, this study finds that with U.S. listed Chinese firms, higher percentages of audit committee accounting, supervisor and user financial expertise are positively associated with internal control effectiveness. This study next finds that for direct listed firms, only higher percentages of audit committee accounting and user financial expertise are positively associated with internal control effectiveness. Finally, this study finds that for direct listed firms, CEO duality is negatively associated with internal control effectiveness.