An Empirical Examination of the Relationships among Independent Directors, Family Ownership and Effectiveness of Internal Control

Recent years have seen many cases of fraudulent financial reporting occurred around the world. The importance of corporate governance has thus regained the attention from academics, practitioners and policy makers. Internal control is an essential and integral part of corporate governance and the implementation and effectiveness of internal control have become more important than before. The aim of this study attempts to explore how independent directors associate with the effectiveness of internal control and how managerial-family shareholding relates to the effectiveness of internal control.
This study uses the deficiencies in internal control quoted from the Prospectus for the Initial Public Offering of each sampled corporation as a measure of internal control effectiveness. The data for the factors associated with internal controls-percentage of independent directors, and managerial-family shareholding-are collected from Taiwan Economic Journal Database. The results based on 156 companies becoming listed on Taiwan Stock Exchange in the period from December 2002 to February 2006 are as follows:
1. There is no significant relationship between percentage of independent directors and the incidence of material deficiencies in internal control.
2. There is a positive and significant relationship between managerial-family shareholding and the incidence of material deficiencies in internal control.
The results of this study suggest the policymakers that, while promoting internal control, managerial-family shareholding should be taken into account. Limitations and suggestions for future research are offered.