Strategy, control activities, monitoring and effectiveness

Abstract

PurposeFirst, this paper aims to provide empirical evidence of the interaction between the components of an internal control system. Second, it seeks to integrate work from the field of strategy and that on the internal control system from the field of auditing. The purpose of this paper is to enable a more profound understanding of how different strategic orientations may influence effectiveness, depending on the components of the internal control system.Design/methodology/approachData were collected through an online questionnaire and analyzed using multiple regression analysis, i.e. a three‐way interaction model. The result was a usable sample of the opinions of 741 managers working in Finland.FindingsThe results indicate that, for prospector firms, high degrees of internal control activity and low degrees of monitoring ensure a greater effectiveness of the internal control system. On the other hand, for analyzers a high degree of internal control activity and high degrees of monitoring lead to a highly effective internal control system. In addition, our findings indicate no significant differences between defenders and analyzers.Research limitations/implicationsThe research is limited to only two components of the internal control system, namely, internal control activities and monitoring. Future research is needed to examine the interactions of other components of the internal control system.Practical implicationsThe paper demonstrates the need for managers to be aware of the drivers of the effectiveness of the internal control system and the relationships essential to drive effectiveness, especially when operating in different strategic fields. While all components of an internal control system are vital, this study shows that a good fit between them can lead to improved effectiveness.Originality/valueThis is the first empirical study that has used a three‐way interaction method to study internal control structures and their effectiveness in an organizational context. Coupled with previous work, it suggests the need for both researchers and practitioners to examine the interactions of an internal control system and how they impact on the effectiveness of that system.