A Research on Affection of Ineffective Internal Control to Firms' Operations: Evidence from Firms' Inventory Management

In this paper, the author finds out that the ineffective internal control over financial reporting has affected on Chinese firms' operations by examining the association between inventory-related material weaknesses in internal control over financial reporting and firms' inventory management. Chinese firms with inventory-related material weaknesses have systematically lower inventory turnover ratios. Finally, this author provides the generalizability of findings by examining all material weaknesses in internal control over financial reporting, and provides evidence that firms' returns on assets are associated with both their existence. Collectively, the findings support the general hypothesis that internal control over financial reporting has an economically significant effect on firms' operations.