Going Too Far is as Bad as not Going Far enough: An Inverted U-shaped Relationship between Internal Control and Operational Efficiency

2021 ◽  
Author(s):  
Hanwen Chen ◽  
Ting Li ◽  
Chuancai Zhang
Keyword(s):  
Internal Control ◽  
Risk Taking ◽  
Optimal Level ◽  
Operational Efficiency ◽  
Internal Controls ◽  
Information Channel ◽  
Control Quality ◽  
Internal Management

In this study, we explore the inverted U-shaped association between internal control quality and firm operational efficiency. Although effective internal controls can facilitate and improve operational efficiency, excessive internal controls can negatively affect operational efficiency by (1) influencing management energy, attention, risk-taking, and innovation motivations; (2) hindering employees' creativity, enthusiasm, and trust. Our findings support the inverted U-shaped association. We further explore and prove the two channels through which internal controls affect firm operational efficiency: the "information channel" (the quality of internal management reports), and the "application channel" (the enforcement of internal controls). Additionally, we show that the inverted U-shaped association only exists in non-state-owned firms. We do not find significant association between internal control quality and operational efficiency in state-owned firms. Overall, this study suggests that firms should not only establish an optimal level of internal controls, but also enforce the internal controls effectively to achieve their intended goals.

Internal Control Quality and Bank Risk-Taking and Performance

2020 ◽  
Author(s):  
Matthew Baugh ◽  
Matthew Ege ◽  
Christopher G. Yust
Keyword(s):  
Internal Control ◽  
Risk Taking ◽  
Downside Risk ◽  
Internal Controls ◽  
Bank Risk ◽  
Material Weakness ◽  
Control Quality ◽  
Interest Income ◽  
Upside Risk ◽  
And Performance

Using a sample of bank-years from 2005 to 2017, we examine the effect of internal control quality on future risk-taking and performance. We find that banks that disclose a material weakness in internal controls have higher risk-taking and worse performance in the future, including having a higher (lower) likelihood of experiencing large losses (gains). These findings suggest that weak controls increase (reduce) downside (upside) risk-taking or conversely that strong controls increase (reduce) upside (downside) risk-taking. Path analyses suggest that 22.3 to 43.7 percent of the effect of internal control quality on future performance is through risk-taking. Additionally, material weaknesses are negatively associated with total asset, loan, interest income, and non-interest income growth, suggesting that internal control quality affects both core and non-core activities of banks. Overall, results suggest that strong internal controls improve bank risk-taking, in part through asymmetrically reducing downside risk-taking while facilitating upside risk-taking, ultimately improving bank performance.

scholarly journals Peran Integritas Personal sebagai Pemediasi pada Pengaruh Lingkungan Etika Organisasi, Kualitas Pengendalian Internal dan Keadilan Organisasi terhadap Terjadinya Fraud

2014 ◽  
Vol 1 (01) ◽  
Author(s):  
Gustanty Dian Fitria ◽  
Amilin Amilin
Keyword(s):  
Environmental Ethics ◽  
Internal Control ◽  
Structural Equation ◽  
Agricultural Land ◽  
Jel Classification ◽  
Internal Controls ◽  
Equation Modeling ◽  
Personal Integrity ◽  
Government Accounting

A B S T R A C T Fraud phenomenon occurs in many government institutions. Fraudulent practices in government accounting materially detrimental to the country. Therefore these crimes fall into the category of extraordinary crime. There needs to be an attempt to commit the crime prevention. This study aims to determine the environmental impact organizational ethics, justice organization and the quality of internal controls against fraud with personal integrity intervening either partially or simultaneously. Source of data used in this study was a questionnaire distributed to 160 employees of the Center for Agricultural Land Resources Ministry of Agriculture. Analysis of the data used is the analysis of Structural Equation Modeling (SEM). The results show that the organization’s environmental ethics, justice organization and the quality of internal control occurrence of fraud by an intervening variable of personal integrity. A B S T R A K Fenomena fraud banyak terjadi di institusi pemerintahan. Praktik kecurangan akuntansi di pemerintah merugikan negara secara material. Oleh karenanya kejahatan ini masuk dalam kategori extra ordinary crime. Perlu adanya upaya untuk melakukan pencegahan pada kejahatan ini. Studi ini bertujuan untuk mengetahui pengaruh lingkungan etika organisasi, keadilan organisasi dan kualitas pengendalian internal terhadap terjadinya fraud dengan intervening integritas personal baik secara parsial maupun simultan. Sumber data yang digunakan dalam penelitian ini adalah kuesioner yang disebarkan kepada 160 orang pegawai Balai Besar Sumber Daya Lahan Pertanian Kementerian Pertanian. Analisis data yang digunakan adalah analisis Structural Equation Modelling (SEM). Hasil penelitian menunjukkan bahwa lingkungan etika organisasi, keadilan organisasi dan kualitas pengendalian internal berpengaruh terhadap terjadinya fraud dengan variabel intervening integritas personal. JEL Classification: H83

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

scholarly journals Peran Integritas Personal sebagai Pemediasi pada Pengaruh Lingkungan Etika Organisasi, Kualitas Pengendalian Internal dan Keadilan Organisasi terhadap Terjadinya Fraud

2014 ◽  
Vol 1 (01) ◽  
Author(s):  
Gustanty Dian Fitria ◽  
Amilin Amilin
Keyword(s):  
Environmental Ethics ◽  
Internal Control ◽  
Structural Equation ◽  
Agricultural Land ◽  
Jel Classification ◽  
Internal Controls ◽  
Equation Modeling ◽  
Personal Integrity ◽  
Government Accounting

A B S T R A C T Fraud phenomenon occurs in many government institutions. Fraudulent practices in government accounting materially detrimental to the country. Therefore these crimes fall into the category of extraordinary crime. There needs to be an attempt to commit the crime prevention. This study aims to determine the environmental impact organizational ethics, justice organization and the quality of internal controls against fraud with personal integrity intervening either partially or simultaneously. Source of data used in this study was a questionnaire distributed to 160 employees of the Center for Agricultural Land Resources Ministry of Agriculture. Analysis of the data used is the analysis of Structural Equation Modeling (SEM). The results show that the organization’s environmental ethics, justice organization and the quality of internal control occurrence of fraud by an intervening variable of personal integrity. A B S T R A K Fenomena fraud banyak terjadi di institusi pemerintahan. Praktik kecurangan akuntansi di pemerintah merugikan negara secara material. Oleh karenanya kejahatan ini masuk dalam kategori extra ordinary crime. Perlu adanya upaya untuk melakukan pencegahan pada kejahatan ini. Studi ini bertujuan untuk mengetahui pengaruh lingkungan etika organisasi, keadilan organisasi dan kualitas pengendalian internal terhadap terjadinya fraud dengan intervening integritas personal baik secara parsial maupun simultan. Sumber data yang digunakan dalam penelitian ini adalah kuesioner yang disebarkan kepada 160 orang pegawai Balai Besar Sumber Daya Lahan Pertanian Kementerian Pertanian. Analisis data yang digunakan adalah analisis Structural Equation Modelling (SEM). Hasil penelitian menunjukkan bahwa lingkungan etika organisasi, keadilan organisasi dan kualitas pengendalian internal berpengaruh terhadap terjadinya fraud dengan variabel intervening integritas personal. JEL Classification: H83

scholarly journals Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

2017 ◽  
Vol 39 (1) ◽  
pp. 25-44 ◽  
Author(s):  
Cristi A. Gleason ◽  
Morton Pincus ◽  
Sonja Olhoft Rego
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Early Years ◽  
Control Material ◽  
Material Weaknesses ◽  
Implementation Period ◽  
Tax Expense

ABSTRACT We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality

2008 ◽  
Vol 83 (1) ◽  
pp. 217-250 ◽  
Author(s):  
Hollis Ashbaugh-Skaife ◽  
Daniel W. Collins ◽  
William R. Kinney ◽  
Ryan LaFond
Keyword(s):  
Internal Control ◽  
Strong Evidence ◽  
Control Problems ◽  
Cross Sectional ◽  
Accrual Quality ◽  
Control Quality ◽  
Internal Control Weaknesses ◽  
Abnormal Accruals ◽  
Internal Control Deficiencies

This paper investigates the effect of internal control deficiencies and their remediation on accrual quality. We first document that firms reporting internal control deficiencies have lower quality accruals as measured by accrual noise and absolute abnormal accruals relative to firms not reporting internal control problems. Second, we find that firms that report internal control deficiencies have significantly larger positive and larger negative abnormal accruals relative to control firms. This finding suggests internal control weaknesses are more likely to lead to unintentional errors that add noise to accruals than intentional misstatements that bias earnings upward. Third, we document that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems. Finally, we find firms that receive different internal control audit opinions in successive years exhibit changes in accrual quality consistent with changes in internal control quality. Collectively, our cross-sectional and intertemporal change tests provide strong evidence that the quality of internal control affects the quality of accruals.

Are Material Weaknesses in Internal Controls Associated with Poor M&A Decisions? Evidence from Goodwill Impairment

2017 ◽  
Vol 37 (4) ◽  
pp. 49-74 ◽  
Author(s):  
Dennis H. Caplan ◽  
Saurav K. Dutta ◽  
Alfred Zhu Liu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Managerial Performance ◽  
Goodwill Impairment ◽  
Material Weaknesses

SUMMARY This paper examines the effect of the quality of a firm's internal control over financial reporting (ICFR) on the quality of corporate M&A decisions. We use material weaknesses in internal control (ICMWs) from SOX 404 audits as a proxy for the quality of a firm's ICFR and use future goodwill impairment to proxy for the quality of managers' M&A decisions. We find that goodwill recognized from acquisitions in years concurrent with ICMWs has a greater rate of impairment in subsequent years than goodwill recognized from acquisitions in years without ICMWs, thereby establishing a link between ICMW and goodwill impairment. We further show that disclosure and remediation of ICMWs appear to improve valuations of subsequent acquisitions. Our study contributes to the literature on internal controls by documenting unanticipated benefits of SOX 404 audits on managerial performance, and to the goodwill literature by identifying ICMWs as a determinant of goodwill impairment.

ANALISIS IMPLEMENTASI SISTEM INFORMASI MANAJEMEN DAERAH (SIMDA) BARANG MILIK DAERAH

2015 ◽  
Vol 13 (2) ◽  
pp. 70
Author(s):  
Supriyanto Supriyanto
Keyword(s):  
Local Government ◽  
Internal Control ◽  
Government Regulation ◽  
Information Quality ◽  
Internal Controls ◽  
Regional Government ◽  
Process Data ◽  
Physical Order ◽  
Assets Management

After the enactment of Law No. 23 of 2014 on Regional Government, and Government Regulation No. 27 of 2014 on the Assets Management of State/Regions, each region must be manage its assets in an orderly administration, the rule of law, and physical order. To facilitate the local government in assets management, has been developed the Regional Management Information System-Regional Assets (SIMDA-BMD). Local government of Banjarnegara has implemented SIMDA-BMD since 2009. This paper discusses the analysis of the implementation of SIMDA-BMD on Local government of Banjarnegara. The purpose of this paper is to determine how SIMDA-BMD process data into information, internal controls have been applied, and the characteristics of the quality of information produced. The result of this paper, it SIMDA-BMD is good in processing data becomes information and internal control that is applied is sufficient. The information quality produced by SIMDA-BMD is meet the relevant quality characteristics, but has not completely reliable because the book value is equal to the purchase price, it is because SIMDA-BMD does not have the depreciation facility.

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