Game Analysis of Internal Control and Risk Management

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 is established and payoff functions for managers and investors are designed. The result shows that the decrease of business risk cannot be realized by severe penalties, instead, the frequency of internal control in risk monitoring must be taken into consideration, and otherwise it will stimulate enterprise risk monitoring paradox. It is an effective way for enterprises to reduce risk by lowering the cost of internal control in risk monitoring and improving the ability of risk prevention.