Internal Control Environment Research Articles

Corporate Environmental, Social, and Governance (ESG) Performance and the Internal Control Environment

SYNOPSIS We consider how corporate environmental, social, and governance (ESG) performance relates to the strength of the internal control environment. The transparent reporting hypothesis predicts that high ESG performance signals ethical decision making and/or strong financial performance, both of which manifest in a stronger internal control environment and, therefore, fewer material weaknesses in internal controls. We find that ESG performance is negatively related to the likelihood of general internal control weaknesses, consistent with transparent reporting. We also find that ESG performance is negatively related to company-level internal control weaknesses, which are considered relatively severe. Further, we find that ESG performance is negatively associated with specific internal control weaknesses that indicate a lack of ethical tone at the top. We find support for both ethical and performance explanations behind the transparent reporting hypothesis. Overall, our results suggest that ESG performance is positively associated with the strength of the internal control environment. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M14; M40; M42.

Effectiveness of internal controls mechanisms in preventing and detecting fraud

This review examines the effectiveness of internal control mechanisms in preventing and detecting fraud within organizations. Internal control mechanisms are essential components of corporate governance, designed to safeguard assets, ensure the accuracy of financial records, and promote operational efficiency. The study begins by defining internal controls and their critical role in fraud prevention and detection, highlighting the significance of a robust control environment. The components of the internal control environment, risk assessment, control activities, information and communication, and monitoring activities are discussed to provide a comprehensive understanding of their structure and function. Preventive controls, such as segregation of duties, authorization processes, and access controls, are analyzed to assess their role in minimizing the risk of fraud occurrence. Case studies and examples of organizations with effective preventive measures are presented to illustrate best practices. The challenges and limitations faced by organizations in implementing preventive controls are also explored. Detective controls, including reconciliation processes, internal audits, and whistleblower hotlines, are evaluated for their ability to identify and expose fraudulent activities. The review reviews case studies demonstrating the success of detective controls in uncovering fraud and discusses the obstacles organizations encounter in maintaining effective detection mechanisms. The evaluation section of the study focuses on metrics and indicators used to assess the effectiveness of internal controls, such as the reduction in fraud incidents and increased detection rates. Tools and techniques for evaluation, including internal and external audits, are examined to understand their role in ensuring control effectiveness. The review concludes by offering best practices for enhancing internal control mechanisms, emphasizing continuous monitoring, employee training, and the adoption of advanced technologies. The critical role of management in fostering a culture of ethical behavior and supporting internal audit functions is underscored. Recommendations for organizations and directions for future research are provided to guide ongoing efforts in fraud prevention and detection. Keywords: Fraud Prevention, Internal Control, Detective Control.

Does state capital equity affect ESG performance of private firms?—based on the perspective of sustainable development of Chinese enterprises

Along with the intensification of global ecological problems, corporate environmental, social, and governance (ESG) issues have attracted extensive attention from the investment community, and solving these issues is crucial for sustainable development. However, little is known about the research on equity structure reform on corporate ESG performance, especially state-owned capital on private firms' ESG performance. To this end, we utilize the panel data of 1,589 privately listed firms in China from 2013 to 2021 to explore the impact of state-owned capital on the ESG performance of private firms. The findings suggest that state-owned capital significantly improves the ESG performance of private firms. In addition, the results of mechanism analysis indicate that state-owned capital stimulates ESG performance through the dual path of improving the mitigation of external financial constraint problems and internal control environment problems. We also find that firms' external environmental shocks enhance the extent to which state capital injection into private firms enhances ESG performance, and these external environmental shocks include the strength of environmental regulation in the region, whether the firms' attribute is that of heavily polluting industries, and the strength of external media attention. In summary, our findings support the conjecture that state capital injection into private firms will be followed by enhanced ESG performance, and the external environment is a factor that influences this process. Our study may provide lessons for the sustainable development of private firms and dig deeper into the internal root causes and external shock factors.

INTERNAL CONTROL SYSTEMS AND FINANCIAL PERFORMANCE OF COMPANIES LISTED IN NAIROBI SECURITIES EXCHANGE

<p>Internal control systems involve various methods and measures the organisation takes to safeguard assets, accurately check financial reports, enhance operational efficiency and execute managerial policies to achieve their financial objectives. The study sought to determine how internal control systems influence the financial performance of Nairobi Securities Exchange (NSE) listed companies in Kenya. Specifically, the study sought to assess the effect of risk assessment, internal control environment and information and communication systems on the financial performance of the listed companies in NSE. The study adopted a descriptive research design. The target population comprised 63 listed companies in NSE as of 30th June 2023. A sample of 39 companies was drawn from the target population using a stratified random sampling technique. The study used primary data collected using structured questionnaires. Data analysis was carried out using descriptive and inferential statistical methods. The results were presented using tables and charts. The study found that internal control systems positively and significantly influenced the financial performance of the listed companies in NSE. The study recommended that to improve the financial performance of these firms, the management needs to determine and implement the optimal combination of effective and efficient internal control mechanisms.</p><p> </p><p><strong>JEL</strong>: G20; L10; L20; M10</p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/soc/0737/a.php" alt="Hit counter" /></p>

Does internal control affect firms' use of derivatives? Evidence from China

This study investigates the impact of internal control on firms' use of derivatives. We find that firms with strong internal controls are more likely to use derivatives than firms with weak internal controls. In cross-sectional analyses, we find that this relationship is more pronounced for subsamples with lower executive pay-performance sensitivity, lower executive ownership, smaller board size, and higher proportion of busy directors. Additional analyses suggest that among the five components of internal control, control environment, risk assessment, information & communication, and monitoring exhibit stronger impacts on derivatives use than that of control activities. We contribute to the literature on the determinants of firms' use of derivatives and highlight some components of internal control are more critical than the others in guiding a firm's derivatives usage.

Determinants of Accountability for Financial Management of Non-Profit Organizations in Indonesia with the Internal Control and Supervision Environment as Moderation Variables

This study aims to examine the determinants of financial management accountability in non-profit organizations. Utilizing a quantitative methodology employing Partial Least Squares (PLS) analysis, the study assessed 14 hypotheses, relying on coefficient values and significance levels for hypothesis validation. While the choice of analysis model and rationale behind its selection were not explicitly elucidated, the study ensured rigor through pilot testing of the questionnaire to establish validity and reliability. From 140 distributed questionnaires, 87 were returned, and 79 met the inclusion criteria for analysis. The findings suggest a significant positive influence of transparency, fund type, financial statement presentation, and accessibility on financial management accountability. Additionally, internal control factors such as transparency, fund types, financial statement presentation, accessibility, and internal supervision underscore the importance of these elements in bolstering accountability. However, it is noteworthy that the direct impact of the control environment on financial management accountability was not observed within the study's context. While the identification and operationalization of the studied variables were not extensively detailed, it is acknowledged that the relatively small sample size and the focus solely on non-profit organizations in Indonesia may constrain the generalizability of the findings. Nonetheless, this research provides valuable insights into the factors influencing accountability practices in NGO financial management, potentially benefiting stakeholders and contributing to the existing literature on financial management, particularly within the realm of non-profit entities.

Artificial intelligence applications implication for ESG performance: can digital transformation of enterprises promote sustainable development?

Purpose In the global context, artificial intelligence (AI) technology and environmental, social and governance (ESG) have emerged as central drivers facilitating corporate transformation and the business model revolution. This paper aims to investigate whether and how the application of AI enhances the ESG performance of enterprises. Design/methodology/approach This study uses panel data from Chinese A-share listed companies spanning the period from 2012 to 2022. Through a multivariate regression analysis, it examines the impact of AI on the ESG performance of enterprises. Findings The findings suggest that the application of AI in enterprises has a positive impact on ESG performance. Internal control systems within the organization and external information environments act as mediators in the relationship between AI and corporate ESG performance. Furthermore, corporate compliance plays a moderating role in the connection between AI and corporate ESG performance. Originality/value This paper underscores the pivotal role played by AI in enhancing corporate ESG performance. It explores the pathways to improving corporate ESG behavior from the perspectives of internal control and information environments. This discussion holds significant implications for advancing the application of AI in enterprises and enhancing their sustainable governance capabilities.

CSRC’s supervision and corporate investment efficiency—based on the random inspection

ABSTRACT The random inspection is an important innovation of CSRC’s regulatory initiatives. Using this quasi-natural experiment conducted by the CSRC, we examine the impact of the random inspection on corporate investment efficiency. The result shows that after the listed firms are inspected, the investment efficiency is significantly improved. Further analysis shows that the improvement of accounting information quality and corporate governance are two important channels through which random inspection affects corporate investment efficiency. Cross-sectional analysis finds that the effect is more pronounced in the group with low internal control and poor legal environment. Lastly, we find that secondary random inspection can significantly strengthen the positive association between random inspection and corporate investment efficiency. The conclusions support the positive significance of CSRC’s supervision.

Controlling Shareholder Equity Pledge and Corporate ESG Responsibility Fulfillment Inhibition or Promotion

Corporate ESG responsibility fulfillment has become an important measure for enterprises to practice low-carbon development concepts at the micro level and promote corporate social responsibility fulfillment and corporate governance. During this process, the behavior of corporate shareholders has also become an important factor affecting the fulfillment of corporate ESG responsibilities. Based on the data of China's A-share listed companies from 2010 to 2022, this paper studies and analyzes the impact of the controlling shareholder's equity pledge behavior on the performance of corporate ESG responsibilities. The study found that the controlling party's equity pledge behavior inhibits the fulfillment of ESG responsibilities; optimizing the internal control environment and increasing corporate social attention can reduce the negative impact of pledge behavior on the fulfillment of ESG responsibilities to a certain extent; in the analysis of corporate heterogeneity, Equity pledge has less inhibitory effect on state-owned enterprises' performance of ESG responsibilities, and the effect on non-state-owned enterprises is more obvious. Based on this, the research puts forward three dimensions of policy suggestions to improve ownership structure, strengthen internal control and strengthen external supervision, in order to bring effective guidance for standardizing enterprise ESG performance.

Internal Control and the Insider versus Outsider CEO Choice

ABSTRACT We examine whether the quality of a firm’s internal controls affects a board’s decision to hire an insider as CEO. We find that the board is less likely to select an insider as CEO following an internal control material weakness (ICMW) disclosure. In cross-sectional analyses, we find that the adverse effect of weak internal controls on the likelihood of hiring an insider CEO is attenuated for firms that restate past misstatements and is pronounced when boards are more independent. We also find that audit fees are lower for ICMW firms when an outsider CEO is appointed, indicating that external auditors perceive lower audit risk. Taken together, our findings suggest that in the presence of a weak internal control environment, the board prefers an outsider CEO over an insider who may have been a part of the internal control issues, notwithstanding the fact that evaluating the outsider CEO can be challenging.

Effect of Internal Control Environment System on Financial Performance of Selected Federal Institutions in Oyo State, Nigeria

This study focuses on the effect of organizational structure and human resource polies nda procedure on financial performance of some selected federal institutions in Oyo State. The methodology of the study is based on survey research approach. The statistical data used for the study were obtained by distribution of one hundred and fifty (150) questionnaire among selected employees, in the five (5) federal institutions considered in this research work. These respondent were selected using non-probability sampling method, the data obtained from the questionnaire were analyzed using multiple regression statistical tools in SPSS (Statistical packages for social sciences.). The result of the analysis shows that organizational structure and human resource polies and procedure has significant relationship with accountability and cost management in the institutions, and this was because the P- value obtained (i.e.0.002) using multiple regression was greater than the benchmark value of 5% specified in SPSS for this analysis. Based on this result, the study recommends that management should develop more effective strategies on organization structure and human resource policy and procedure that will ensure effective and efficient, accountability and cost management

Internal Control Environment and Financial Accountability of Savings and Credit Cooperatives in Mid-Western Uganda

Purpose: To test the association between internal control environment and financial accountability of SACCOs in Mid-Western Uganda.
 Methodology: The study adopted a cross-sectional research design and positivist paradigm to gather data from 93 SACCOs in Mid-Western Uganda using a closed-ended questionnaire. Data was analyzed using the standard linear regression.
 Findings: The study depict a strong positive significant association relationship between internal control environment and financial accountability of SACCOs in Mid-Western Uganda.
 Unique Contribution to Theory, Practice and Policy: The high level of transparency and value for money can be achieved if management puts into place effective internal control environment if SACCOs are to realize a high level of transparence and value for money.

Green innovation and the cost of equity: evidence from China

PurposeThis paper aims to examine the association between green innovation and the cost of equity in China. This study relies on the investors’ base perspective and shareholders’ perceived risk perspective to investigate the relation between green innovation and the cost of equity in China.Design/methodology/approachThe paper uses firm-fixed effect regression for a sample of Chinese public companies for the period 2008–2018.FindingsThe authors find a negative relationship between green innovation and the cost of equity capital. This negative association is found to be more pronounced for less financially constrained firms, during periods of high economic policy uncertainty, and for firms with a strong internal control environment. Finally, the paper shows that the negative association became more pronounced after the passage of the Environmental Protection Law of China in 2012. The results remain robust to possible endogeneity concerns.Originality/valueThis study contributes to the green innovation literature by documenting that shareholders favorably view firms implementing green innovation policies. The study also has policy implications for Chinese regulators in improving the green credit policy.

Research on the Internal Control Environment of State-owned Enterprises

With the development of China's economy and social progress, enterprises have put forward new requirements for their own management ability. In order to better adapt to the development needs of the current market economy, state-owned enterprises must strengthen the internal control construction. In this process, we should start from many aspects and take corresponding optimization measures to improve its internal control level. This article mainly analyzes and discusses the internal control environment of state-owned enterprises. Taking H Enterprise as an example, it analyzes some common problems and causes of state-owned enterprises at present; At the same time, it also points out that there are still some deficiencies in the internal control environment of state-owned enterprises at the present stage, and then puts forward specific measures to further improve the internal control environment of state-owned enterprises, in order to effectively improve the status quo and existing problems of the internal control environment of state-owned enterprises through these measures.

The (COSO) Framework: Implications of Internal Control Components on the Performance Manufacturing Companies

The study examines the implications of internal control components on risk assessment using the Committee of Sponsoring Organizations (COSO) framework on manufacturing companies in Erbil, Kurdistan. A multivariate analysis was applied on 250 responses in modelling the individual effects of internal control components (control environment, risk assessment, control activities, information and communication, and monitoring) on risk assessment. The results of the study indicated that the integrated internal control environment, risk assessment, control activities and monitoring components have significant positive effects on organisational performance compared to information and communications. The present study advances the literature on internal control as corporate governance and performance-enhancing tool. Additionally, it also advances internal control’s conceptual framework on organisational performance. Lastly, the results of this study advance construct and item development involving internal control components and organisational performance while testing relationships to uncover the significance of their implications in enhancing organisational performance

Generalist CEOs, management risk and internal control weaknesses

AbstractThis study examines the relationship between CEOs’ general ability and the quality of internal control over financial reporting (ICFR). Using a sample of S&P 1500 firms in the United States from 2004 to 2015, I find that firms with generalist (specialist) CEOs are more (less) likely to report internal control weaknesses under Section 404 of Sarbanes‐Oxley Act of 2002 (ICW404). The positive relationship between generalist CEOs and ICW404 is weaker when the management risk is lower (longer CEO tenure). These results are robust to alternative models and approaches to address potential endogeneity issues. Additional analyses suggest that this positive relationship is attributed to generalist CEOs’ excessive risk taking. Furthermore, CEO type is related to company‐wide ICW404, ICW404 due to staffing, complexity and general issues, rather than account‐specific ICW404 or ICW404 due to revenue recognition issues. Drawing from the Upper Echelons Theory, this study contributes to the research on ICFR quality by documenting CEO type as an additional determinant of ICW404. It highlights the importance of investors, auditors and regulators considering the CEO's career experience and operating style when assessing a firm's internal control environment. It also adds to the literature on general managerial ability by documenting the cost of hiring generalist CEOs regarding ICFR quality.

ANALISA PENGENDALIAN INTERN SISTEM INFORMASI AKUNTANSI PENGGAJIAN KARYAWAN OUTSOURCING PADA PT SWABINA GATRA

This study aims to determine the implementation of internal control of the outsourced employee payroll accounting information system and what are the constraints of the internal control of the outsourced employee payroll accounting information system. The data used in this study were obtained from interviews, literature studies, and documentation. The method used in this study is a qualitative descriptive method using data reduction analysis techniques, data presentation, and data inference. The result of this research is that the implementation of internal control of the accounting information system is in accordance with the provisions of the company. Starting from a clear segregation of duties, internal control environment, required supporting documents, accounting procedures, to payment terms. The obstacle experienced by the company was that there had been a discrepancy between the salaries received by outsourced employees and evidence of attendance records in the system caused by errors in the attendance application system.

Does the Internal Control Environment Drive the Performance of Cooperatives? A PLS-SEM Perspective

This study examined the relationship between the internal control environment and financial performance of deposits taking savings and credit cooperative societies (DT-SACCOs) in Kenya. Using the Agency theory as a framework, the study focused on integrity and ethical values, commitment to competence, organization’s structure, management philosophy, and operating styles. The research utilized a quantitative approach and PLS-SEM as the main design, with data collected through a structured questionnaire from 110 DT-SACCO managers. The study revealed that the internal control environment positively impacts financial performance. Commitment to competence (β = 0.441, p <0.05), the organization’s structure (β= 0.466, p <0.05), and management philosophy and operating styles (β= 0.267, p <0.05), while integrity and ethical value had a negative impact (β=-0.317, p >0.05). The study provides valuable insights for policymakers, regulators, and DT-SACCOs, emphasizing the importance of a strong internal control framework for effective risk mitigation and enhanced governance practices. By focusing on building a robust internal control environment, DT-SACCOs can optimize their financial performance. The study extends the literature on the link between internal control environment and performance in Kenya and provides a basis for future research.

Corporate Environmental, Social, and Governance (ESG) Performance and the Internal Control Environment

Corporate Environmental, Social, and Governance (ESG) Performance and the Internal Control Environment

The mediating effect of information technology on the cost of internal control systems and enhancing confidence in quality relationship on accounting information quality

This study aimed to investigate the mediating effect of information technology on the relationship between internal control system's costs and enhancing confidence in the quality of accounting information in banks working in Jordan. To achieve the objectives of the study, the researchers designed a 56-items questionnaire and 200 versions of this questionnaire were distributed on a random sample from the study population represented by all employees of the internal control departments in banks operating in Jordan, and 152 questionnaires were retrieved, and 4 questionnaires were excluded because they were not valid for analysis so, the valid questionnaires for analysis were 148 questionnaires. Effect was assessed using the Multiple Regression Analysis and after the appropriate statistical treatment, the study concluded with a group of results the most important among which that there was a mediating effect of information technology on the relationship between internal control system's costs and increasing confidence in accounting information in banks working in Jordan in terms of internal control environment costs, internal control activities' costs, internal risk assessment's costs, internal monitoring and follow-up costs, information and internal communication costs among banks working in Jordan that use internal control systems. In light of the results revealed, the researchers recommended the need for implementing internal control systems within certain cost limits in banks because of their significant role in increasing confidence in accounting information through the aforementioned variables.