This study examines the relationships between the individual characteristics of board members and internal control weaknesses using data from Chinese listed firms from 2007 to 2015. The results indicate that the individual characteristics of board members including education, experience, certification ,integrity and training are related to internal control deficiencies. The results also show that the 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. Furthermore, ownership has a moderating impact on the relationship between board characteristics and internal control.However, board behavior does not mediate the relationship between board members and internal control. Thus, it is suggested that board characteristics and internal control are directly linked. It is useful for directors to know that the characteristics of board members do make a difference.

Introduction

This research investigates whether the characteristics of individual board members are associated with internal control problems1 . The first internal control regulation in China, sometimes2 called a Chinese version of the Sarbanes-Oxley Act of 2002 (henceforth “China SOX”), was enacted in July 2008. China SOX, a regulation adopted to enhance risk management and to prevent business disasters, became effective on January 1, 2012. This regulation requires Chinese listed firms and their auditors to evaluate the effectiveness of their internal controls and to provide opinions on internal controls in their annual reports (China SOX, p1). In particular, China SOX requires that boards of directors in China accept primary responsibility for the establishment and implementation of internal control (China SOX, p1). This requirement differs from the situations covered by US SOX3 , demonstrating that, in China, the board of directors plays an important role in internal control. In addition, Chinese corporate governance has unique characteristics, and these characteristics have a substantial impact on internal control enforcement. First, the Chinese stock market prior to these reforms was characterized by weak legal enforcement and poor corporate governance (Chen & Chan, 2009). As an alternative mechanism, the key personnel in Chinese firms play key roles in the operation of enterprises. Second, the Chinese government greatly influences corporate governance (Chambers, 2005), and it attempts to improve internal control levels. State-owned firms and non-state-owned firms can differ in the effectiveness of their internal control. These new Chinese regulations and the country’s institutional backgrounds offer an opportunity to conduct research: this research investigates how unique governance mechanisms, mixed with a socialistic market economy and state power, affect the internal control of Chinese firms, together with whether these reforms lead to improved governance for Chinese companies. Internal control is “a process, implemented by an entity’s board of directors, board of supervisors, management, and other personnel, with the aim of realizing control goals” (China SOX, p1). Individual characteristics include abilities, knowledge and skills (Hillman & Dalziel, 2003). This theoretical study supports the premise that particular features of the boards of directors are related to internal control (Hoitash et al., 2009) and management advice (Haynes & Hillman, 2010). When an organization’s management and ownership are separated, an “agency problem” arises (Jensen & Meckling, 1976), in that the goals and desires of owners and managers are in conflict, and the shareholders cannot adequately monitor managerial work (Eisenhardt, 1989). The role of the boards of directors is to represent the interests of the owners and to protect the interests of the shareholders (Hart, 1993).