Internal control effectiveness – a clustering approach

This study develops and tests a moderated mediation model regarding the effectiveness of internal control structure on organizational ethical behaviors via the mediating role of internal control effectiveness and the moderating role of organizational mindfulness in the relationship between internal control structure and internal control effectiveness. The proposed model and its hypotheses were tested using partial least squares structural equation modeling (PLS-SEM) in SmartPLS3 with survey data from 540 large Vietnamese manufacturing and service firms. This study found the following: (1) The internal control structure positively affects internal control effectiveness, which in turn promotes ethical organizational behaviors; and (2) The effect of internal control structure on internal control effectiveness is amplified by strengthening organizational mindfulness. The findings demonstrate that combining internal control systems and organizational mindfulness contributes to the ethical business practices of firms in an emerging market. Our study bridges the gap in the literature on internal control and mindfulness by providing empirical evidence on how the interaction between organizational mindfulness and internal control systems can promote ethical business practices. Additionally, our study advances the current understanding of how internal control systems can interact with organizational mindfulness to influence ethical business practices in the context of an emerging market.

In recent years, incidents such as chairman Kant being arrested by the police for suspected crimes occur frequently. In the development process of these incidents, the negligence of internal control has played a guiding role. This warns us that listed companies in addition to timely disclosure of internal control reports, establish and improve the internal control system construction, but also the introduction of external supervision system, timely audit work, and the effectiveness of enterprise internal control on the follow-up audit work of audit pricing is worth discussing. This paper takes the data of 354 manufacturing companies listed in 2017 and 2018 in Shenzhen Stock Exchange from 2015 to 2017 in 2018 as samples to explore the impact of the effectiveness of internal control on audit pricing. The empirical results show that there is no significant negative correlation between the effectiveness of internal control of this year and the audit pricing of this year, and a significant negative correlation between the effectiveness of internal control of the previous year and the audit pricing of this year, indicating that the effectiveness of internal control of the previous year is an important influencing factor of the audit pricing of this year. Starting from the effectiveness of internal control, this paper discusses the influencing factors of audit pricing, enriches the research on the influencing factors of audit pricing, and provides relevant reference information for the government to standardize audit pricing.

This study aims to examine the effects of pressure, internal control, and organizational commitment on fraud in the procurement process at RSUD Bendan, Pekalongan City. The independent variables tested are pressure, internal control, and organizational commitment, with organizational commitment serving as a moderating variable and fraud as the dependent variable. The population of this study includes all employees of RSUD Bendan, with a sample consisting of employees involved in the procurement of goods and services. The sampling technique used in this study is purposive sampling. Data analysis is conducted using Partial Least Squares (PLS). The results of hypothesis testing indicate that pressure and organizational commitment affect fraud, while internal control does not have effect on fraud. Additionally, organizational commitment strengthens the relationship between pressure and internal control with fraud. The implication of this research is that RSUD Bendan should improve internal control in the procurement of goods and services REFERENCE Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Instructor solutions manual: Fraud examination (6th ed., pp. 1–14). Cengage Learning. www.cengage.com/global. Bendan Hospital. (2017). Profil Rumah Sakit Umum Daerah Bendan. https://rsudbendan.pekalongankota.go.id/halaman/profil-rsud-bendan.html Cressey, D. R. (1950). The criminal violation of financial trust. American Sociological Review, 15(6), 738. https://doi.org/10.2307/2086606 Dessler, G. (2011). Human resource management. Pearson Education Limited, Upper Saddle River. Farida, S. N. (2017). Analisis pengaruh fraud diamond, personal attitude dan effectiveness of internal control terhadap tendensi kecurangan karyawan pada dealer otomotif di wilayah Jombang. Thesis. Universitas Islam Negeri Maulana Malik Ibrahim Malang. Fitri, F., & Nadirsyah. (2019). 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Purpose: The paper examines the effectiveness of internal control systems, explores the exposure of Spanish banks to the dangers of default as a result of internal control systems and establishes a relationship between internal controls and credit risk. Design/Methodology/Approach: Quantitative research approach is used to test hypotheses on the relationship between internal controls and credit risk among listed banks in Spain. Data from Bankscope and company websites from 2004-2013 were used. Generalized Least Squares (random effect) econometric estimation technique was used for the model. Findings: We find that internal control systems are in place but their effectiveness cannot be guaranteed. This exposes Spanish listed banks to serious default situations. There is significant effect of internal controls on credit risk especially the control environment, risk management, control activities and monitoring. The non-disclosure of material internal control weakness is a contributory factor to the ineffective internal control systems. There is however a perceived board ineffectiveness which does not augur well for effective internal control systems. Board characteristics for Spanish banks confirm the agency theory. Research Limitations and Implications: Data unavailability for certain years, variables and many inactive banks did not permit a larger sample size than expected. The use of quantitative variables lacks flexibility. Practical Implications: Bank management will find the work useful to ensure strict enforcement of internal control mechanisms and see it as both credit risk and operational risk issues. Central bank should hurry to compel banks to disclose material internal control weakness as provided in the reviewed COSO framework. Social Implications: Ineffective internal controls lead to credit risks, bank closure and loss of investments. Society suffers a lot from such losses and contagion. Disclosure of material internal control weakness is a social responsibility of banks. Originality/Value: The authors are yet to come across the use of purely quantitative variables to model the effect of elements of internal controls on credit risk. This study opens and adds a new dimension of internal controls not only to be seen as operational risk issue but also credit risk.

The collapse of China Aviation Oil (Singapore), which has aroused huge attention and consideration on the effective implement of internal control in energy enterprises, warn us that the internal system, lacking the balance of power, will inevitably be an empty talk.This study, based on a series of reality settings such as Operation Guidance for the Internal Control of Petroleum and Petrochemical Industry, has taken the listed companies in energy industry as research samples, and analyzed the influence of power balance on the effectiveness of internal control.The study has found that: (1) Generally, the effectiveness of internal control in energy industry lies above the average level; (2) The power balance, no matter the proxy variable is CEO duality or the proportion of the first big shareholder and the second big shareholder, is negatively correlated with internal control.The research results show that the unbalanced internal power, including both the unbalanced authorities and equity imbalance, in energy industry will weaken the effectiveness of internal control.Hence, to enhance the effectiveness energy enterprises' internal control asks for further optimizing the balance of stock and strengthening the constraint of senior executives' power.

The research purpose of the article is to evaluate the effects of the internal control components on the effectiveness of internal control of transport construction enterprises in Vietnam, on the basis of which we made recommendations to contribute to improving the effectiveness of internal control. Sample was collected from Vietnamese medium and large transport construction enterprises, the total number of sample questionnaires sent was 400, 330 filled-up questionnaires was collected and 250 was used for the study purpose. Quantitative research method was used for the study with the help of the SPSS software. The variables in the model are as follows: the dependent variable is the effectiveness of internal control, 5 independent variables are: control environment, risk assessment, control activities, communication, and monitoring. The results of the analysis explain 80.4% variation as a result of the effect of internal control on the Vietnamese transport construction enterprise. All five components positively affect the effectiveness of internal controls in the order of influence, which are: control activities, control environment, communication, risk assessment and monitoring. This study contributes in providing more empirical evidence about the effects of internal control components on the effectiveness of internal control of transport construction enterprises in Vietnam. The study has proposed a number of recommendations to help transport construction enterprises improve control activities and contribute towards improving the effectiveness of internal control.

This study investigates the relationship between family ownership and material weaknesses in internal controls over financial reporting. Recent Sarbanes-Oxley (SOX) regulation and mandatory disclosure of family relations among block shareholders and directors in Israel offer an ultimate setting for exploring this relationship. The findings reveal that (i) family ownership is significantly associated with less material weaknesses in internal controls, (ii) material weaknesses in internal controls are associated with lower earnings quality in family-owned firms than in non-family-owned firms, and (iii) investors find weaknesses in internal controls to be more serious in their potential to lessen future performance in family-owned firms than in non-family-owned firms. The contribution of the study is threefold. First, the findings expand our understanding of how ownership structure influences financial reporting procedures. Second, they suggest that family-owned firms use internal controls as a mechanism to enhance earnings quality. Third, they extend the literature on the implications of the SOX legislation by highlighting the joint effect of family ownership and effective internal controls in achieving high-quality financial reports.

This study aims at investigating the effects of internal control effectiveness on business survival of food businesses in Thailand through the mediators of productivity improvement and value creation. In this study, 155 food businesses in Thailand are the samples of the study. The results show that internal control effectiveness has a significant influence on productivity improvement and business survival. Productivity improvement critically affects value creation and business survival while value creation is an important determinant of business survival. However, internal control effectiveness has no relationship with value creation. Also, productivity improvement explicitly mediates the internal control effectiveness-business survival relationships. In summary, internal control effectiveness can enhance firms' sustainable competitive advantage, superior performance and long-term survival. Firms need to focus on internal control effectiveness through investing their assets and resources and utilizing their abilities, competencies and capabilities in order to continuously develop and improve their appropriate concepts and characteristics in an organization. Better internal control effectiveness definitely leads to more long-term survival. To generalize the research results, future research needs to collect data from other businesses and industries. Increased response rate of the study is important for future research to verify and confirm the research results.

The implications of ineffective internal control and SOX 404 reporting for financial analysts

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-layout-grid-align: none;" class="MsoNormal"><span style="font-size: 10pt; mso-bidi-font-weight: bold;"><span style="font-family: Times New Roman;">Prior studies found that companies with internal control deficiencies incorporate abnormal accounting accruals into their financial statements.<span style="mso-spacerun: yes;"> </span>However, these studies did not consider the materiality of abnormal accruals. Abnormal accruals should be within materiality when financial statements receive clean audit opinions. When material internal control weaknesses (MICW) exist, to compensate for additional risk, auditors should apply more audit effort to gain the quantity and quality of evidence necessary to obtain a reasonable degree of assurance to support their audit reports. We find evidence of this because audit fees are significantly higher for MICW companies than those for effective internal controls (EIC) companies in our sample. Accordingly, financial statements receiving clean audit opinions should not contain material abnormal accruals irrespective of whether controls are effective EIC or ineffective MICW. To examine this issue, we use post-SOX data to estimate abnormal accruals using a revenue-based accrual model for a matched sample of companies with clean audit opinions on their financial statements: one-half EIC and the other half with MICW. Then, we establish material abnormal revenue accruals (MARA), which is the difference between estimated abnormal revenue accruals and a quantitative materiality based on assets. Finally, we compare MARA between EIC and MICW companies. We find no significant difference in MARA between EIC and MICW companies. We provide a summary of important findings in Table 3, and conclude with suggestions to further improve audit and financial reporting quality.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

PurposeThis research seeks to examine whether two relevant characteristics, source objectivity and internal control effectiveness, influence how auditors evaluate evidence items supporting accounting estimates.Design/methodology/approachA controlled experiment approach with a sample of 24 auditors from one large international firm.FindingsResults indicate that effective internal controls reduce the impact of relying on internal as opposed to external evidence items. Results also suggest that auditors place reliance on internal control effectiveness when they evaluate external evidence items.Practical implicationsRecent professional trends, such as the demand for faster financial reporting, put pressure on auditors to rely on internal rather than more persuasive external evidence items. Relying on less persuasive evidence items reduces audit effectiveness. Auditors may respond by examining a second evidence characteristic; US audit standards suggest evaluating internal control effectiveness if evidence was generated from internal (i.e. client) sources. Thus, this study explores whether internal control effectiveness reduces the impact of relying on evidence items with lower source objectivity.Originality/valuePrior research has concentrated on examining the impact of a change in one evidence characteristic on audit judgment; this study expands the understanding of the evidence evaluation process by exploring how auditors evaluate multiple evidence characteristics. Furthermore, as suggested by Bonner, this research identifies an audit judgment deficiency (i.e. reliance on less persuasive internal evidence due to the demand for faster financial reporting) and examines one potential remedy (i.e. consideration of internal control effectiveness).

The concept of Public Internal Financial Control (PIFC) has been developed by the European Commission in order to provide a structured and operational model to assist national governments in reengineering their internal control environment and in particular to upgrade their public sector control systems in line with international standards and EU best practice. The democratic changes affecting all areas of life in the last years, have led to reforms in the management of public finances of the public sector in the Republic of Albania. On the road of the accession to the European Union, Albania is in the process of important conceptual, legislative and structural reform of the Public Internal Financial Control framework with the aim of strengthening the managerial accountability of the managers of public sector organizations and further develop independent internal audit. The paper aims to give some key issues regarding PIFC development in Albania such as: the level of transparency regarding the status of the financial management and control and internal audit in the public sector; the awareness of the Heads of public organizations about the importance of sound financial management and control and to enhance their managerial accountability; information about the self assessment of the heads of public sector organizations on the adequacy and the effectiveness of internal control and about the progress made. It also outlines the weaknesses, solutions and development opportunities based on the assessment of the status of the financial management and control systems as well as of the internal audit. Through conclusions it summarizes the main directions in which the Albanian institutions must be focused in the future for further development and improvement of management of public resources. The development of the new model of public internal financial control in Albania demands from all the participants in the process, leading to effective action in accordance with their roles and responsibilities. Only proper implementation of new legislation and efforts by all stakeholders can lead to achieving the goal - to create a modern system, reliable and functioning of public internal financial control. In this regard the CHU/FMC will outline specific measures related to strengthening managerial accountability and updating of legislation and methodology in the field of internal control in accordance with EU legislation and best practices. As one of the three pillars of the Public Internal Financial Control System, Internal Audit has developed and continuously improved in order to take its modern role as advisor for the assessment and systems and contributing to the achievement of strategic and operational objectives of the organization, always in accordance with international standards and best practices. DOI: 10.5901/ajis.2014.v3n4p301

PurposeThe implementation of compliance procedures associated with the Sarbanes‐Oxley Act of 2002 came at a great cost to most publicly‐traded firms, largely due to the internal control disclosures required by Section 404 of the Act. The purpose of this paper is to contribute to the inquiry on internal control effectiveness by examining the impact of the type (same or different) and number of internal control weaknesses on audit fees. The paper also examines whether firms that remediate continue to incur higher audit fees compared to firms that never disclosed a weakness.Design/methodology/approachThe authors evaluate the impact of internal control weaknesses and their remediation on audit fees using ordinary least squares regression for 9,122 firm year observations (3,096 unique firms) over the time period 2004‐2007.FindingsThe authors find: an incremental impact on audit fees of additional material weakness disclosures; firms that report the same material weakness pay higher fees than firms reporting a different material weakness in consecutive years; and audit fees remain high one, two, and three years following remediation compared to a firm that never disclosed an internal control weakness.Originality/valueIn contrast with prior studies, the sample includes firms that remediated weaknesses, firms that failed to remediate weaknesses, and firms that did not have prior weaknesses. The results suggest that the failure to remediate has greater risk implications than new weaknesses and that material weaknesses are associated with higher audit fees several years after remediation.

Audit committee size is used as a moderating variable in this study to see how deferred tax expense affects indications of tax avoidance after being moderated and to see the effect of internal control, investment in fixed assets, and deferred tax expense affecting indications of tax avoidance before being moderated. Tax is a mandatory contribution that must be given to the state. This study used 100 observational samples from 20 energy sector companies listed on the Indonesia Stock Exchange between 2017 and 2021. Panel data regression analysis and moderation regression were used as analytical methods in this study. The findings show that the indicator of tax avoidance is simultaneously influenced by internal control variables, fixed asset investment, and deferred tax expenses. The fixed asset investment variable has a negative impact on indications of tax avoidance. However, indications of tax avoidance are not affected by internal control variables and deferred tax expense. In addition, deferred tax expense for indications of tax avoidance is not affected by the size of the audit committee.

SYNOPSIS The purpose of this study is to investigate whether SOX Section 404 material weaknesses manifest in real earnings management behavior. The empirical findings indicate that, compared to companies with effective internal controls, companies with existing material weaknesses in their internal controls engage in more manipulation of real activities (particularly inventory overproduction). This implies that the weak commitment by management to provide effective internal control system and high-quality financial information relates to a tendency to use real earnings management methods. Moreover, we find evidence suggesting that companies employ real earnings management (overproduction and reduction of discretionary expenses) after disclosing previous year's material weaknesses. We conjecture that the public disclosure of material weaknesses induces management to strive to mitigate the expected negative reactions of stakeholders to the disclosure by engaging in real earnings management, which is not easily detected or constrained by outsiders. Overall, this study suggests that material weaknesses in internal controls signal an environment where management is more inclined to employ real earnings management.