Abstract
Effective internal control is expected to have a positive effect on Environmental, Social, and Governance (ESG) ratings, which are an indicator of corporate sustainability, as it ensures improvements in efficiency and effectiveness in operations, reliable reports, and compliance with applicable laws and regulations. However, no matter how well an internal control system is designed, internal control quality deteriorates if internal control (IC) personnel do not understand the firm’s business or lack accounting experience. This study first explores the relationship between ESG ratings and internal control weaknesses (ICWs). We then examine two types of career experience of IC personnel—length of service and accounting experience—and their effect on ICWs. We conduct logit regression analyses using the data of 1876 non-financial listed firms in Korea. The results show that ICW firms have low ESG ratings. We also find that the accounting experience of IC personnel is more closely related to ICWs than the length of service. This implies that the accounting expertise of IC personnel may have a greater effect on internal control quality than the understanding of a firm’s business. Overall, our findings provide evidence that firms must have IC personnel with sufficient accounting expertise for sustainable management.
Highlights
Internal control is becoming one of the most important tools for firms to develop self-discipline and improve management performance [1,2,3,4]
This study investigates whether internal control weaknesses (ICWs) affect ESG ratings and analyzes the characteristics of internal control (IC) personnel’s career experience that affect ICWs
The low effectiveness of internal controls leads to inefficient use of resources, low reliability of financial and non-financial information, and non-compliance, which adversely affect corporate sustainability [5]
Summary
Internal control is becoming one of the most important tools for firms to develop self-discipline and improve management performance [1,2,3,4]. The results show that ICW firms have low ESG ratings This implies that effective internal control leads to a positive evaluation of corporate sustainability. This study classifies IC personnel into three job positions—internal accounting manager (generally the internal accounting manager (CFO)), executive officer for accounting, and accounting staff—and investigates the effects of career experience of IC personnel in each job position on ICWs. The results are as follows. This study provides empirical evidence on whether internal control affects ESG rating, an indicator of corporate sustainability. Using unique data on the career experience of IC personnel, we provide empirical evidence which shows that accounting expertise and an understanding of the firm’s business is important in improving internal control quality.
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