How Effective are Organizations' Internal Controls? Insights into Specific Internal Control Elements

2012 ◽  
Vol 6 (1) ◽  
pp. A31-A50 ◽  
Author(s):  
Dana R. Hermanson ◽  
Jason L. Smith ◽  
Nathaniel M. Stephens
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Component Level ◽  
Public Companies ◽  
Tone At The Top ◽  
Survey Responses

SUMMARY Based on survey responses from approximately 500 Chief Audit Executives (CAEs) and other internal auditors, this article provides an insider's view of the perceived strength of organizations' internal controls (i.e., internal control over financial reporting) in the Control Environment, Risk Assessment, and Monitoring components of the Committee of Sponsoring Organizations' (COSO 1992a) Internal Control—Integrated Framework. Although the respondents largely rate control strength as relatively high, we identify several areas for potential improvement of internal controls, especially related to assessing the “tone at the top,” as well as following up on deviations from policy and management override of controls. In analyzing individual control elements, we find that public companies' controls are consistently rated as more effective than those of other organizations. We also find a number of interesting differences across key industries, especially in the Monitoring component, where banks and other financial services firms appear to have more robust Monitoring controls than do healthcare and other services firms. The component-level analysis reveals that internal control component strength is positively related to the CAE reporting primarily to the audit committee, public company status, and the average tenure of the internal audit function staff, among other findings. Based on the survey findings, we describe key implications relevant to internal and external auditors, accounting researchers and educators, and management.

Effects of reporting relationship and type of internal control deficiency on internal auditors’ internal control evaluations

2018 ◽  
Vol 33 (3) ◽  
pp. 318-335 ◽  
Author(s):  
Audrey Gramling ◽  
Arnold Schneider
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Material Weakness ◽  
Content Type ◽  
Internal Auditors ◽  
Tone At The Top ◽  
Internal Audit Function ◽  
Professional Guidance

Purpose This paper aims to explore whether an internal auditor’s evaluation of internal control deficiencies are influenced by the party with primary influence over the internal audit function and by the type of internal control deficiency. Design/methodology/approach A behavioral experiment is conducted with internal auditors as participants in a 2 × 2 between-subjects factorial design. Findings Results indicate that internal auditors are less likely to evaluate a pervasive control deficiency related to “tone at the top” as a material weakness than a process-specific control deficiency. Furthermore, internal auditors are somewhat less likely to evaluate a process-specific internal control deficiency as a material weakness when management has primary influence over the internal audit function than when the audit committee has primary influence. It is also found that the best practice of internal audit oversight (i.e., primary oversight of internal auditors by the audit committee) may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal control. Research limitations/implications Limitations of this research include lack of economic consequences (e.g. future pay and job loss) associated with the internal control decisions made by the participants; less concise information provided to the participants than would generally be available to them; and lack of generalizability of the findings beyond the specific company setting and internal control scenario portrayed in the case materials. Practical implications Not evaluating a pervasive control deficiency related to “tone at the top” as a material weakness seems to not fully align with relevant professional guidance and can possibly result in inaccurate internal information about the quality of internal controls. Furthermore, having an internal auditor’s evaluation of a process-specific internal control deficiency influenced by the party with primary influence over the internal audit function would not appear to align with relevant professional guidance. Finally, primary oversight by the audit committee of the internal auditors may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal controls and, thus, possible communication of inaccurate internal control information. Originality/value This study is the first to address whether the party with primary influence over the internal audit function influences an internal auditor’s evaluation of internal control deficiencies.

Why did management and auditors fail to identify ineffective internal controls in their initial SOX 404 reviews?

2008 ◽  
Vol 7 (4) ◽  
pp. 338-354 ◽  
Author(s):  
Kam C. Chan ◽  
Picheng Lee ◽  
Gim S. Seow
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Control Group ◽  
Corporate Boards ◽  
Content Type ◽  
Factors Affecting ◽  
Factors Associated ◽  
Client Relationship

PurposeThe purpose of this paper is to investigate the rationale for the failure of management and auditors to identify material internal control weaknesses (ICWs) in their initial Sarbanes‐Oxley Act of 2002 (SOX) 404 reviews, resulting in subsequent restatement of their opinions.Design/methodology/approachThe paper focuses on the factors associated with the failure of management and auditor to identify material internal controls weaknesses in their initial SOX 404 reports. Logistic regression is run on a sample of 56 firms that reported material internal controls weaknesses in their amended internal control reports and a control group of 344 firms that reported material internal controls weaknesses (i.e. ineffective internal controls) in their initial internal control reports for 2004.FindingsThe results show that firm size, the use of a Big 4 auditor, the ratio of non‐audit to total fees, and the need for accounting restatements are positively associated with the probability to file an amended internal control report. The number of ICWs and the number of audit committee meetings are negatively associated with the probability to file an amended internal control report.Practical implicationsThe paper's findings suggest that regulators and corporate boards should consider providing more guidelines on audit committee practices in addition to the audit committee structure. For example, more guidance by the board is needed to ensure that the audit committee is active in overseeing the company's auditor–client relationship and its internal audit function.Originality/valueEmpirical findings on factors associated with the failure of management and auditor to identify material ICWs in their SOX 404 review can contribute to an understanding of factors affecting the efficiency of the SOX 404 review by attributing such failure to either inherent factors such as operational complexity and industry membership or to managerial choices in auditor‐client relationship and corporate governance issues. An understanding of these factors can help companies and the Public Company Accounting Oversight Board and the Securities and Exchange Commission in their efforts to improve the effectiveness and the efficiency of the current SOX 404 process.

Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms

2000 ◽  
Vol 14 (4) ◽  
pp. 441-454 ◽  
Author(s):  
Mark S. Beasley ◽  
Joseph V. Carcello ◽  
Dana R. Hermanson ◽  
Paul D. Lapides
Keyword(s):  
Health Care ◽  
Corporate Governance ◽  
Financial Reporting ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Financial Statement ◽  
Audit Committees ◽  
Financial Statement Fraud ◽  
Governance Mechanisms

This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industries—technology, health care, and financial services—and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms. For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support. This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.

scholarly journals ¿Son las características del comité de auditoría importantes para el presupuesto de auditoría interna en empresas de Malasia?

2018 ◽  
Vol 63 (2) ◽  
pp. 32
Author(s):  
Redhwan Al-Dhamari ◽  
Almahdi Almagdoub ◽  
Bakr Al-Gamrh
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Negative Impact ◽  
Internal Audit ◽  
Internal Governance ◽  
Policy Makers ◽  
Control Functions ◽  
Study Support ◽  
Recent Policy

<p class="Default"><span lang="EN-US">An audit committee is viewed as an essential self-regulatory internal governance instrument that is expected to provide an oversight role over the entire process of financial reporting. An internal audit is also one of the corporate governance cornerstones that is essential for the effective monitoring of the operating performance of internal control. To ensure its effectiveness, the audit committee monitors the resources available to the internal audit, and internal control functions should be directly reported to the audit committee. This study analyses the effect of audit committee characteristics on internal audit budget in Malaysia, where data on internal audit budget is available and how well audit committee monitors the internal audit function is questionable. Our study also opens the door to an unanswered question, that is, whether an audit committee index is related to internal audit budget. Data of 96 companies listed on Bursa Malaysia for a three-year period, 2012-2014, was utilized to achieve this end. The regression results show that audit committee meeting and index are significantly and positively associated with internal audit budget. They also indicate that audit committee tenure has a significant and negative impact on internal audit budget. The findings of the study support the recent policy initiatives in relation to audit committee and internal audit. They also serve as a wake-up call to policy makers in requiring more committed and skilled members on the audit committee.</span></p>

scholarly journals The role of effective audit committee in strengthening the financial reporting: Evidence from Jordanian listed companies

2012 ◽  
Vol 9 (3) ◽  
pp. 59-68 ◽  
Author(s):  
Mo’taz Amin Al-Sa’eed ◽  
Soud M. Al-Mahamid
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Listed Companies ◽  
International Standards ◽  
Future Research ◽  
External Audit ◽  
Cross Sectional ◽  
Study Results

This study aims to understand the features of an effective audit committee and its role in strengthening financial reporting. A questionnaire based survey was circulated to public listed companies on the Amman Stock Exchange (Banking, insurance, and financial institutions). The study was aimed at internal audit managers and finance managers. Out of 156 questionnaires, we received 110 back which represents a 71% response rate. The study results show that the research respondents have a good level of education and experience. In addition, there is a relationship between internal controls, international standards on auditing, institute of internal audit; Jordan securities commission requirements, external audit, understanding of audit committee functions, and financial reporting. Furthermore, the internal control, international standard on auditing and institute of internal audit, Jordan securities commission requirements, External audit, understanding of audit committee functions can explain a significant amount of the variability in financial reporting. Finally, the research results also show that age and gender make a difference for our respondents when they evaluate financial reporting. The study like other cross sectional studies is not free of limitations. Managerial implications and new avenues of future research are supplied. Future research also can borrow the research model and apply a longitudinal study to solve the cross sectional study problems.

scholarly journals The Effect of Corporate Governance in Palestine on the Efficiency of Internal Audit: Empirical Evidence

2016 ◽  
Vol 8 (5) ◽  
pp. 124 ◽  
Author(s):  
Suhaib Tawfiq Jarrar
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Audit Committee ◽  
Audit Quality ◽  
Internal Audit ◽  
Public Companies ◽  
Internal Auditor ◽  
The Right ◽  
The Impact

This paper comes to examine the impact of corporate governance in Palestine on the efficiency of internal audit from the reality of the listed corporations in the Palestine Exchange; [PEX]. The population of this paper consists of all the 25 listed Palestinian companies in the Palestine Exchange that have internal auditor. It also includes another 5 companies that rely on the internal audit by external companies. Hence, the number of the reviewed companies by this study is 30 companies (Palestine Exchange Market). Thereupon, 30 questionaires were distributed and retrived. However, this manuscript states a summary of the most important results. These results are explained as is shown in the following: (1) the findings of the study state that there is an effect of applying the variables of corporate governance altogether on the quality of the internal audit of the listed public companies in the Palestine Exchange. These rules are (disclosure and transparency, accountability, responsibility, justice, and independency). (2) The results of the study indicate that there is a significant effect of applying the corporate governance variables individually on the quality of the internal audit of the listed public companies in the Palestine Exchange. Thus, the effect of these variables appears contrasted respectively as the following: disclosure and transparency, justice and accountability, independency and responsibility. (3) The corporate governance represents combining the right practices and procedures which operate within the standards and rules that governed by the obligatory standards. These standards aim at ensuring that there aren’t any contradictions between the strategic goals of the company and the fuctional procedures of the administration in achieving these goals. (4) The internal audit adds value to the company through the functions that enhance its performance within corporate governance. This includes providing information to all levels of the management, evaluating the system of the internal control and the risk management, in addition to sticking the company with the principles of corporate governance. The findings of the study come up with the following recommendations: (1) the study assures the importance of applying the corporate governance principles because of their clear effect on the internal audit quality. It also recommends working efficiently on the professional development of the auditors and improving their performance through training programs, as well, encouraging them to keep up with the latest developments in the field of the auditing and other related fields. (2) It strongly recommends working on enhancing and activating the role of the board of directors and the audit committee; as well as granting them the independency. Hence, they will be able to carry out the tasks assigned to them. Consequently, they will avoid the effects that the company may be exposed to as a result of the internal weakness of the practical aspects of the principles of corporate governance; in addition to the negative impacts of this issue on the quality of the internal audit.

Assessing Internal Audit with Text Mining

2018 ◽  
Vol 17 (02) ◽  
pp. 1850020 ◽  
Author(s):  
Georgia Boskou ◽  
Efstathios Kirkos ◽  
Charalambos Spathis
Keyword(s):  
Text Mining ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Audit ◽  
Internal Controls ◽  
Annual Reports ◽  
Previous Attempt ◽  
Sarbanes Oxley ◽  
Audit Information

Recently internal controls, corporate governance and risk management have received a great deal of attention. Regarding internal control, several research studies address the issue of internal audit quality. Noteworthy, according to Sarbanes–Oxley (SOX) the internal controls over financial reporting are assessed by the auditors and the management. In the present study, we assess internal controls over financial reporting by employing Text Mining techniques. We analyse the annual reports of 133 publicly traded Greek Companies. The textual parts of the annual reports that refer to internal audit mechanism are extracted. We adopt a Vector Space model and the term-document matrix records the occurrence frequencies of the terms. By applying feature selection, a set of significant keywords, which are used as predictors, is extracted. The Linear Regression model developed explains the variance of the data and highlights significant predictors. The model manages to successfully assess the internal audit function. By performing PCA, major underlying procedures and concepts related to internal audit quality are revealed. Inspite of the undoubted importance of the assessment of internal audit, no previous attempt has been made to assess internal audit and to extract internal audit information from corporate disclosures by using Text Mining techniques. Our results can be useful to internal and external auditors, managers, company decision-makers, regulators and researchers.

scholarly journals Sustaining competitive advantage through good governance and fiscal controls: Risk determinants in internal controls

2020 ◽  
Vol 18 (1) ◽  
pp. 34-46
Author(s):  
Md. Jahidur Rahman ◽  
Rob Kim Marjerison
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Rapid Growth ◽  
Audit Committee ◽  
Good Governance ◽  
Geographic Distance ◽  
Negative Relationship ◽  
Internal Controls ◽  
Future Research ◽  
The Board Of Directors

This study conducts a comprehensive review of the literature published during 1989-2020 to identify the factors that can cause internal control weakness. This review is organized around five main groups, namely: 1) rapid growth and restructuring, 2) financial reporting complexity, 3) auditor tenure, 4) cultural differences, and 5) corporate governance. We perform an integrated literature review approach. Among the several factors found, some factors (the proportion of managerial ownership, Individualism, power distance, financial reporting complexity, rapid growth, and auditor-customer geographic distance) have a positive relationship with internal control weakness while others (the quality of the board of directors and auditing committees, directors’ compensation, and uncertainty avoidance) have a negative relationship. The findings contribute to future research by examining the factors that can cause internal control weakness from different perspectives, which will prove to be useful for investors, auditors, audit committee members, managers, and other stakeholders regarding the prevention of internal controls weaknesses through the application of solid internal controls as well as a path towards the improvement of existing problems of internal control weakness.

The Influence of Audit Committee Expertise on Firms' Internal Controls: Evidence from Mergers and Acquisitions

2020 ◽  
Vol 34 (3) ◽  
pp. 193-211
Author(s):  
Mikhail Sterin
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Committees ◽  
First Year ◽  
Opt Out ◽  
Indirect Path ◽  
Control Decision

SYNOPSIS This study examines how audit committee expertise influences firms' key internal control scoping decisions. Using a unique merger and acquisition (M&A) setting where the internal control audit is voluntary, I study whether audit committee expertise is associated with the deferral of internal control testing for acquired firms. I also examine whether this internal control decision provides a channel through which audit committee expertise leads to positive financial reporting outcomes. I find that audit committees with greater specialized expertise (industry and legal) are less likely to opt-out of first-year target internal control over financial reporting (ICFR) integration. In my second analysis, I find that target ICFR integration provides an indirect path through which industry and legal expertise reduce the likelihood of misstatement. This study contributes to the audit committee and internal controls literature by providing evidence on audit committee influence over firms' internal control decisions and related financial reporting outcomes. JEL Classifications: M41; M42; M48. Data Availability: The data are publicly available from the sources identified in the paper.

scholarly journals The Effects of Interaction between Internal Auditor and Audit Committee on Fraud Detection in Malaysia

2018 ◽  
Vol 7 (4.38) ◽  
pp. 1338
Author(s):  
Sunita Lylia Hamdan ◽  
Nahariah Jaffar ◽  
Ruzanna Ab Razak
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Specific Interaction ◽  
Fraud Detection ◽  
Internal Audit ◽  
Internal Auditing ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors

This study aims to examine the effect of interaction between internal auditor and audit committee on fraud detection in Malaysia.  Specific interaction is firstly; audit committee approving the appointment of chief audit executive, the evaluation of chief audit executive, the dismissal of chief audit executive, the internal audit budget and the internal audit plan or program.  Secondly, audit committee’s involvement in reviewing internal auditor’s work specifically; providing input for the internal audit plan, reviewing the results of internal auditing related to financial reporting, reviewing the results of internal auditing related to internal control, reviewing the results of internal auditing related to compliance with laws and regulation, reviewing the internal audit involvement in management responses to internal audit suggestions, reviewing the difficulties or scope restrictions encountered by internal auditors and reviewing the coordination between internal auditors and external auditors.  Survey questionnaires were mailed to internal auditors attached to 782 companies listed on Bursa Malaysia’s main market. The results of this study suggest that involvement of audit committee in approving chief audit executives’ matters is insignificant on internal auditors’ contribution to fraud detection.  However, audit committee’s involvement in reviewing internal auditors’ work significantly influence the internal auditors’ contribution in fraud detection.       

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