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SMU Associate Professor Goh Beng Wee investigates the benefits and consequences of internal controls
to corporate organisations.
SMU Office of Research In 2001, a scandal involving former US energy giant Enron Corporation broke
out and shocked the world with sordid tales of how its management had exploited the companys lack of
robust internal controls to conceal staggering amounts of debt. Enrons mismanagement not only led to
its collapse but also that of its auditor Arthur Andersen, which until then had been one of the Big Five
accounting firms.
The saga highlighted the importance of internal controls processes that organisations put in place to
ensure that corporate objectives are met under the conditions of reliable financial reporting and
compliance to laws in companies. According to Associate Professor Goh Beng Wee from the Singapore
Management University (SMU) School of Accountancy, such controls range from segregation of duties,
authorisation of transactions, retention of records to physical safeguards.
In 2002, the Sarbanes-Oxley Act was passed in the US to curb poor internal control systems. However,
the Act was met by fierce resistance from companies that were reluctant to be saddled with additional
processes.
In one of his studies conducted with Professor Dan Li from Tsinghua University, Professor Goh examined
how internal controls correlate with accounting conservatism. The latter was argued to increase the
usefulness of financial statements by imposing stronger verification requirements for economic gains
than for economic losses, thereby reducing the likelihood that firms overstate net income.
According to Professor Goh, firms with a strong internal control environment (e.g., strong tone-at-the-top
and/or good internal control culture) are more likely to understand the role of conservatism in contracting
and in reducing agency conflicts. Conversely, to the extent that firms are committed to produce
conservative reports, strong internal controls can facilitate this process. This is because by emphasising
verifiable outcomes, the financial reporting system supplies a rich set of variables that can be used for
contracting purposes. By reducing unintentional errors in the reporting of book value or accounting
earnings, strong internal controls thus provide more comfort to the board of directors, such that
conservatism has been used effectively for contracting purposes and in monitoring managers.
We found that firms which exhibited internal control weaknesses tend to be less conservative with their
financial reporting. However, when they remediate their internal control weaknesses, accounting
conservatism appeared to have increased, shares Professor Goh who specialises in research on the
value of internal controls to companies, investors and policy makers. Our finding that strong internal
controls incentivise firms to be conservative in their financial reporting, instead of overstating accounting
numbers to look good, should be of high relevance to investors.
In another study, Professor Goh found that internal controls had implications beyond simply improving a
firms financial reporting. Although such controls were expensive to put in place, he found that they
benefitted operational efficiency.
Many critics have questioned whether the perceived benefits commensurate with the high costs of
implementing stringent internal reporting requirements, he notes. Surveys and anecdotal evidence have
indicated that such measures would place heavy burdens on companies, particularly small firms, as they
would struggle to cope with the increased costs of compliance, implementation and auditing.
In consideration of these concerns, Professor Goh, together with fellow colleagues Professor Qiang
Cheng and Professor Jae Bum Kim, use a method known as frontier analysis to investigate the
relationship between internal controls and operational efficiency. Although less commonly applied to
accounting research, this methodology has been used extensively in operational management to
evaluate the organisational efficiency of firms.
We found that effective controls also improved operational efficiency, notes Professor Goh. In fact,
smaller companies and those that have more uncertain and poorer information environments are likely
to benefit more from effective internal controls, at least in terms of improving their operational efficiency.
So far, Professor Gohs work on internal controls has focused on firms based in the US. While he is
interested to extend his research focus to Singapore, he is constrained by a lack of data in the local
context because firms here are not required to report on internal controls systems. External auditors are
also not required to audit these mechanisms or provide opinions on them.
Although auditors in Singapore do look at internal controls as part of the regular audit process, the
purpose is to determine how much substantive testing (i.e., procedures used for checking a random
sample of transactions for errors and comparing account balances to find discrepancies) will be needed
in the audit. Any internal control weakness that is detected by the auditors will have to be communicated
in writing to the firms management or the audit committee. However, it is not compulsory for the firm to
report this weakness in its financial reports or to follow up on it, says Professor Goh.
The main reason for the lack of internal controls provisions in Singapore is due to cost issues, he notes.
It is very costly for firms to apply strong internal measures and for time-constrained auditors to conduct
checks.
He thinks that the absence of Enron-like sagas in Singapore indicates the presence of effective self-
regulating mechanisms here. However, there remains a risk that internal controls within firms are not
robust and this may put investors or shareholders at a disadvantage, he cautions.
Even if Singapore does not go the way of regulating internal controls, there is a new area of quality
assurance called integrated reporting, which Professor Goh would like to investigate in the future.
According to the International Integrated Reporting Council (IIRC), an integrated report communicates
how an organisations strategy, governance, performance and prospects create value in the short,
medium and long terms in the context of its external environment.
Integrated reporting is broader than financial reporting and value creation is a key feature. An integrated
report includes aspects such as sustainability; for example, how a company contributes to social
responsibility as well as its workers health and well-being, says Professor Goh.
Given the high cost of producing an integrated report (which in part is due to its broad scope), he thinks
that cost-benefit tradeoffs would be a primary concern to many people. I think local financial regulators
and accounting bodies will be keen to know whether integrated reporting is a worthwhile endeavour for
firms here. This is an area that I would like to conduct research on, he enthuses.
Perceived Adverse Consequences of Quality Threatening Behaviour in
Audit Firms
Research in many countries has consistently shown that audit seniors engage in widespread quality
threatening behaviours (QTB). Regarding the consequences of these behaviours, only audit partners
perceptions of possible consequences have been examined previously. The objective of this study is to
examine audit seniors perceptions of the consequences of QTB for internal and external groups using
semi-structured interviews with 25 audit seniors in Ireland. Findings suggest that detection of the
behaviours is an important factor in determining the consequences for individual auditors, audit firms and
the profession but not for the wider business community. In general, interviewees perceived low risk of
detection and showed little consideration of the ethical implications of their actions. No communication
was perceived to exist between the firms and audit seniors on prohibition of the behaviours or sanctions
against those found guilty of engaging in the behaviours. Although the literature highlights the importance
of personnel controls in complex environments such as audit firms, these findings suggest that the
effectiveness of personnel controls is undermined by a perception that the likelihood of serious
consequences is remote and also by weaknesses in the ethical training of auditors. The use of the term
dysfunctional to describe QTB is open to question given the absence of a perceived link between the
behaviours and consequences for organisational effectiveness found in this study.
Author(s): Faudziah Hanim Fadzil (Faculty of Accountancy, Universiti Utara Malaysia, Kedah, Malaysia)
Hasnah Haron (School of Management, Universiti Sains Malaysia, Penang, Malaysia)
Muhamad Jantan (Centre for Policy Research, Universiti Sains Malaysia, Penang, Malaysia)
Abstract:
Purpose
Two main objectives and they are: to determine whether the internal audit department of the companies
listed in the Bursa Malaysia complies with the Standards for the Professional Practice of Internal Auditors
IIA (2000); and, to determine whether compliance to SPPIA will affect the quality of the internal control
system of the company.
Design/methodology/approach
Two sets of questionnaires were used in the study. Internal auditing practices was measured by the
items listed in the SPPIA and the internal control was measured by means of the statement on internal
control: guidance for directors of public listed companies. The population used in this study was all the
companies listed in the Bursa Malaysia in 2001. This study used both descriptive and inferential analyses.
Findings
It was found that management of internal audit department, professional proficiency, objectivity and
review significantly influence the monitoring aspect of the internal control system. Scope of work and
performance of audit work significantly influences the information and communication aspect of the
internal control system while performance of audit work, professional proficiency and objectivity
significantly influence the control environment aspect of the internal control system. The study also shows
that management of internal audit department, performance of audit work, audit program and audit
reporting significantly influences the risk assessment aspect of the internal control system. Lastly,
performance of audit work and audit reporting significantly influences the control activities aspect of the
internal control system.
Research limitations/implications
The research has contributed to the agency theory with respect to the bonding costs that management
has to pay to the internal auditors for the best interest of the principals of the companies. Another
important implication pertains to the extent of the internal auditing practices among internal auditors in
Malaysian public listed companies. Research has also shown that the compliance with internal auditing
practices partially influence certain aspects of the quality of the internal control system.
Originality/value
This is the first empirical study that has linked the compliance of the internal auditing function to the
SPPIA and its effect on the internal control system.
Citation:
Faudziah Hanim Fadzil, Hasnah Haron, Muhamad Jantan, (2005) "Internal auditing practices and internal
control system", Managerial Auditing Journal, Vol. 20 Issue: 8, pp.844-866,
https://doi.org/10.1108/02686900510619683
Author(s):
Richard Nsoh Atuguba Anthony Opoku Nuamah
Cynthia Mac Andoh Esther Owusu Appiah
Anthony Akwasi Boateng
Abstract :
This project work seeks to study the internal control systems of Offinso Rural Bank Limited.
The Offinso Rural Bank limited was incorporated in as a private limited liability company on
4th day of July 2006 under the Companies Code 1963 (Act 179) and commenced Business
on 10th October 2008.
In instances, where companies suddenly collapse, the obvious resounding question is what
went wrong? a breakdown of the internal control systems are usually the causes.
The wide spread global corporate accounting scandals that assumed near epidemic proportion
in recent years and also, taken cognisance of the fact that, the bank is new with a lot financial
constraints has informed this study.
The total population of the employees of the bank comprised of twenty-eight of the three
branches including head office and ten thousand self-employed and salary workers. The
structured interview questionnaires were distributed to twenty staff both at head office and
the branches and one hundred self employed, and two hundred salary workers representing
seventy-one percent (71%) of the total sample size selected from employees and zero point
zero three percent (0.03%) of the total customers population of the bank.
Findings: It was found that procurement committee was in place and all transactions were
duly authorised and approved by the appropriate Officers. The Bank has instituted an
effective mechanism to ensure that, the duties of one person are being checked by another.
However the assets of the bank have not been embossed with its initials and its identification
numbers. The researchers recommended that all the fixed assets must be embossed with
initials of the bank and its identification numbers and also, all fixed assets must be properly
insured against fire, accident, theft, and natural disaster.
Citation :
Richard Nsoh Atuguba, Cynthia Mac Andoh, Anthony Akwasi Boateng, Anthony Opoku Nuamah,
Esther Owusu Appiah, (2012) A Study of the Internal Control Systems Evidence from Offinso Rural
Bank Limited,A Project Work,
http://ir.csuc.edu.gh:8080/xmlui/bitstream/handle/123456789/58/INTERNAL%20CONTROL.pdf?sequen
ce=1
Title : Research on the Internal Control of Small and Medium
Manufacturing Enterprises under Comprehensive Risk Management
Author(s):
Chen Xiaofang Nie Huili
Abstract :
This paper has combed the research results on internal control of small and medium manufacturing
enterprises of domestic and foreign scholars. Combined with the status analysis of internal control and
risk management of small and medium manufacturing enterprises, this paper built the internal control
framework of small and medium manufacturing enterprises based on comprehensive risk management
in order to improve the system of internal control theory and provide reference to small and medium
manufacturing enterprises in China.
Citation :
Chen Xiaofang, Nie Huili, (n.d.) Research on the Internal Control of Small and Medium Manufacturing
Enterprises under Comprehensive Risk Management, Proceedings of the 8th International Conference
on innovation & Management, pp.680-684,
http://www.pucsp.br/icim/ingles/downloads/papers_2011/part_4/part_4_proc_41.pdf
ABSTRACT
Current business trends have made it imperative for almost all large organizations to maintain effective
internal control systems. Internal control has attracted intense debate and scholarly attention across
industries in accountancy and auditing literature over the past decades. The regulatory and institutional
framework has improved significantly over the years yet still the Ghana Postal Company LIMITED
(GPCC). in particular is faced with lots of challenges including extensive corruption and malpractices. It
is against this background that this study was conducted into the effectiveness of the internal controls of
GPCL. The main objective of the study is to appraise the internal control systems of GPCL. The specific
objectives included; to review the control environment of the company; to examine the effectiveness of
the risk assessment procedure; to assess the adequacy of the established control activities; to review
the information and communication system etc.
Related literature was reviewed. The study adopted the explanatory research design since the study was
a case study type. The study population was staff of Ghana Postal Company Ltd. A sample size of fifty
respondents was used for the study. The purposive sampling technique was adopted. Data was collected
through interview and questionnaire. The data collected were analyzed using tables and graphs and
some finds were made as a result of that. Some of the findings made included: It was revealed from the
study that, the control environment at Ghana Postal service in Ashanti Region is very effective as majority
of the respondents agree to that assertion with a few not being sure of the effectiveness of Control
environment.
In reviewing the risk assessment component of the internal control system at Ghana Post, the study
found that, the risk assessment is also effective. Again the empirical evidence from the study indicated
that, majority of the respondents agree to the assertion that there is an effective control activity functioning
at Ghana Post. With regard to assessing the information and communication system of internal control,
there was evident from the studies that, about many of the respondents are satisfied with that construct
and therefore perceive it to be effective.
The last element of internal control considered by the study was monitoring and this happened to be the
most effective in the company with nearly all respondents showing that, they perceive monitoring to be
effective.
CONTROL ACTIVITIES
Policies and Procedures exist to ensure critical decisions are made with appropriate approval.
Processes exist for independent verification of transactions.
Independent reconciliation of assets and liabilities balances go on.
Processes are in place to ensure that policy overrides are minimal and exceptions are reported
to management.
People in the company have the knowledge, skill and tools to support them in their duties in
order to effectively manage risks and achieve the commissions objectives.
The commission has employed security guards.
The commission uses Close Circuit Television (CCTV) systems to protect physical assets.
MONITORING
There are ongoing processes within the commissions overall operations and these are
addressed by senior management to monitor effective application of the policies, processes and
activities related to internal control and risk management
There are processes to monitor the commissions ability to re-evaluate risks and adjust controls
in response to changes in its objectives and external environment.
There are effective follow-up procedures to ensure that appropriate change or action occurs in
response to changes in risks and control assessments.
Reports on significant failings or weaknesses are reported to management on a timely basis.
There is an appropriate communication to the management on the effectiveness of the on-going
monitoring processes on risks and control matters.
Management approves the overall scope of review activities.
Management approves personnel reviews results of audit.
Periodically, management reviews audit or internal control systems.
Source:
Hackett, Willie (1976). Auditing perspective of the historical development of internal control, Auditing
Symposium III: Proceedings of the 1976 Touche Ross/University of Kansas Symposium on Auditing
Problems (pp. 003-005). University of Kansas, School of Business.
ABSTRACT:
This paper assessed factors that influence the internal controls in ensuring good corporate
governance in financial institutions in developing economies with special reference to Zimbabwe. The
research paper assessed how lack of internal controls affected good corporate governance and aimed
to bring out elements of good corporate governance. It emerged that failure to effectively implement
internal controls contributed significantly to poor corporate governance. The study discovered that
internal control system overrides and the issue of fact cat directors also contributed to poor corporate
governance. The study recommended that there is need for the board of directors to guarantee an
organizational structure that clearly defines management responsibilities, authority and reporting
relationships. There is also need to ensure that delegated responsibilities are effectively carried out to
ensure compliance with internal controls of the financial institution concerned.
KEY WORDS: internal controls; corporate governance; ethical behaviour.
JEL CLASSIFICATION: G21, G28; G30; G38
LITERATURE REVIEW
According to Harvey and Brown (1998), the major components of internal controls are control
environment, accounting system and control procedures. Smircich (1983) subscribes to the same
sentiments by highlighting that the tone at the tog has implications on the direction taken by employees.
Furthermore, Jansen (1998) pointed out that historically internal controls, has focused conforming
employees actions to the desires of management. An internal control system available to a firm
according to Grieves (1998) consists of: management oversight and the control culture; risk recognition
and assessment; control of activities and segregation of duties; information and communication and
monitoring activities and correcting deficiencies. Control environment reflects the overall attitude,
awareness and actions of the board of directors, management and stockholders. The accounting system
consists of the methods, records and report on entitys transactions to provide complete, accurate and
timely financial information. Finally the control procedures are essentially specific procedures put in place
by management to provide assurance that the companys objectives will be met. They usually come in
the form of authorizations, segregation of duties, design and use of adequate documentation and records,
adequate safeguards or access to assets and independent checks on performance. The control
environment reflects the overall attitude, awareness and actions of the BOD, management and
stockholders. Borerwe (2004) consented to Deal and Kennedy (1982)s views and defined corporate
governance from the banking industry as a manner in which boards of directors govern the business
affairs of individual institutions and senior management, affecting how the banks:
- run the day to day operations of the business;
- align corporate activities and behaviours with the expectation that banks will operate in safe and sound
manner, compliance with laws and regulations; and
- set corporate objectives (including generating economic returns to shareholders and protect the
depositors interests.
Robbins (1992) defines internal control systems as the whole system of controls, financial and otherwise,
established by management in order to carry out the business of the enterprise in an orderly and efficient
manner, ensure adherence to management, safeguard the assets and secure as far as possible the
completeness and accuracy of the records. According to Khan (1994), internal controls are designed to
protect an institution from loss or misuse of its assets. They also ensure that all transactions are properly
authorized and thus guarantee or foster good corporate governance. Corporate governance has been
defined as a manner in which the business of an enterprise is directed and controlled, how the corporate
objectives are set and how corporate activities and expectations of the stakeholders are aligned (Coyle,
2003). Corporate governance involves the combination of the body of directors, management and
controls that guide the firm. Borerwe (2004) reiterated that corporate governance is concerned with
holding goals. The aim is to align as near as possible the interest of individuals, corporate and society
this can be ensured by having effective internal control system. Magaisa (2004) supported this view when
he says that effective internal control is an attempt to encourage employees, managers, board members
to think about and make decisions through the doctrine of shared values.
According to the King Report (2002) the corporate discipline, transparency, independency of board
members and committees, fairness, accountability and social responsibility are the essential pillars of
good corporate governance. For a corporate to achieve good corporate governance it must adopt a clear
stance on the following: Strategy, Stewardship, Corporate culture, Corporate reporting, IT systems and
Board operations. Pheysey (1993) added another dimension to the above definition by defining corporate
governance as the way business is conducted in accordance with the shareholders desire which
generally is to make as much money as possible.
According to the Reserve Bank of Zimbabwe (RBZ) a corporate governance guideline protect the integrity
of the sector and cultivates confidence within investors and deposited, conditions that result in free
circulation of funds thus making it easy for banks to undertake their day to day operations without
difficulties. This entails economic development as a result of free circulation of money within the economy.
Magaisa (2004) substantiated the RBZ governors statement by indicating that poorly governed financial
institutions are a liability to the economy and are a functional equivalent of circulatory problem in human
beings. Harvey and Brown (1998) are of the view that the exclusive focus of corporate governance
should maximize shareholder wealth to the extent that wealth maximization conflicts with the interests of
other stake holders interests. Those interests should be ignored unless management is legally required
to take interests into account. Coyle (2003) added that the main corporate governance problem is rooted
in the Blake and Mouton (1985) paradigm of separation of shareholders ownership and managements
control in institutions. This resulted in the emergence of the agency problem, which is the need of
ensuring that management is always acting in the best interest of the shareholders rather than theirs
(Davis and Militelo, 1994). Buchanan (1975) views the firm as a system of stakeholders operating within
a larger system of a host of society that provide necessary legal and market infrastructure for the firms
activities. Khan (1994) supported this view by stating that the goal of directors and management should
be maximizing total wealth creation by the firm. RBZ (2004) recommended that boards of commercial
banks and building societies must have at least five directors. The major reason for this recommendation
was that large boards are for corporate performance because they have a range of expertise to help
make quality decisions and makes it difficult for powerful CEOs to dominate. Blake and Mouton (1985)
indicated that monitoring by boards could deal with at least some problems of corporate governance.
Johnson (1992) proposed that board of directors could solve agency problems if the company under
performs in a health industry because under this situation boards would find it easier to evaluate
performance of the management. Weibach (1998) tested hypothesis advanced by Fama (1980) and
discovered that outside directors behave differently from inside directors and behave differently from
inside directors and boards dominated by outside directors performed better that firms with boards
dominated by insider directors to remove the chief executive officer. RBZ (2004) critique the concept of
multiple appointments, the reason being directors who hold such appointments are ineffective in
discharging their function to monitor managers. Magaisa (2004) concurred with this view and highlighted
that members who sit on multiple boards do not have enough time to think of ways of improving the
institutions in which they lead and it is very difficult for one to have the level of commitment that is
necessary for effective governance to all companies it on board. King Report (2002) recommended high
frequency of board meetings per annum. This suggests that meeting frequency is critical dimension of
an effective board. French and Bell (1999) found that board meeting time is an important resource in
improving the effectiveness of the board and most widely shared problem directors face is lack of time to
carry out their duties. Green (1997) suggested that the board and senior management of financial
institutions are responsible of financial institutions are responsible for promoting high ethical and integrity
standards and for establishing a culture within the organization that emphasis and demonstrated to all
levels of personnel the importance of internal controls. Khan (1994) suggests that an effective internal
control system requires that there are reliable information systems in place that cover all significant
activities of that bank. The systems must be secured, monitored independently and support adequate
contingency arrangements Deal and Kennedy (1982) argued that effective internal control systems
requires effective communication.
Abstract
This study investigated the effect of internal controls on the operating performance of small businesses
in Lagos Metropolis. Primary data were employed through structured questionnaire administered to 200
small businesses selected using convenience sampling. Based on Committee of Sponsoring
Organization Treadway Commission (COSO) updated framework, six determinants of internal control
that include control environment, risk assessment, control activities, information and communication,
monitoring, and information technology were examined to determine their influence on the financial and
operational performance of small businesses. Frequency counts, percentage, and multiple regression
were used to analyse the data obtained. The results showed that these determinants have significant
effect on the efficiency of operations of the selected small businesses, which consequently enhanced
their profitability. The study concluded that internal controls, grounded in the COSO Model, have
significantly positive effects on small business profitability and survivability. Thus, this study
recommended that managers/owners of small businesses should be attentive to the issues of internal
control in order to maximise the business potential and minimise the risk of fraud, error and loss.
Source:
https://www.researchgate.net/publication/287331189_INTERNAL_CONTROLS_AND_OPERATING_P
ERFORMANCE_OF_SMALL_BUSINESSES_IN_LAGOS_METROPOLIS [accessed Jul 11, 2017].
Abstract
Small business and entrepreneurship has emerged as an important area of research over the past 40
years. This paper revolves around the impact of internal control implementation on SMEs. Yet to date,
there have been limited studies on internal control explicitly attempting to link with SMEs performance on
Malaysian environment. The level of business failure due to lack on internal control incidence as reported
by owners is still at a very low level and the overall cost incurred is still within expectation. However, there
is a question whether the low reported rate of business failure is due to adequate preventive actions
currently employed by owners, or whether the owners are reluctant to reveal the truth in order to portray
their efficiency and effectiveness in running their businesses. The objective of this paper is to examine
the relationship between internal control on SME performance. For the sampling purpose, a set of
questionnaires is distributed to the owners' of SME and statistical tools will be used to analyze them. The
results of the study indicate that there is an significant relationship between the implementation of internal
control and performance of SMEs. Most of the SMEs in Malaysia are ready to implement internal control
but it is still in primitive stage and they may have lack of awareness on the advantages of internal control
to their businesses.
Source:
https://www.researchgate.net/publication/281478933_The_Impact_of_Internal_Control_on_the_Perfor
mance_of_Small_and_Medium_Enterprise_Malaysian_Evidence [accessed Jul 11, 2017].