Significant Factors Affecting the Quality of Internal Control over Financial Reporting

影响财务报告内部控制质量的重要因素
Qin Yan | qyan@masonlive.gmu.edu & Yili Wang | ywang81@masonlive.gmu.edu
Accounting, INTO George Mason University

Research Questions Significant Factors Affecting Internal Control

How many primary aspects of factors would improve or reduce The governance factor is associated with management as well as the board
the quality of internal control over financial reporting? Why and of directors (De Villiers et al. 2011; Lee, 2015). Senior management operates
how do these factors affect the quality of internal control? the internal control system by building values and criteria on appropriate
behavior through this control. As the values are well constructed, the
management will have a strong tone at the top and the internal control of a
Introduction company will be very effective. The board of directors takes a set of
operations to ensure the company to be regulated and comply with the rules,
Internal control has been used widely in various companies to processes, and laws. Through different sources, governance is also responsible
for controlling material weakness over financial reporting, improving financial
improve the operating effectiveness and efficiency, along with
reporting quality, and evaluating costs and benefits of internal control (Huang,
reliability of financial reporting. Previous literatures (Nazari,
2010).
Herremans & Warsame, 2015; Hermanson, Smith & Stephens, The audit committee takes charge of the overall supervision on internal
2012) have researched the factors related to the effectiveness of control. The audit committee is made up of independent director who are not
internal control, but have not constructed an integrated a member of this company. Thus, the committee may maintain its
framework of comparison for those factors that affect the quality independence and neutrality in committing its duty. Because of this
of internal control over financial reporting to emphasize which characteristic, the audit committee is able to oversee the quality of internal
are the most significant factors. Therefore, we aim to integrate control over financial reporting. The committee has the responsibility of
and compare the significant factors that affect the quality in an keeping the integrity of financial reporting disclosures, deciding the scope
effort to explore how internal control affects financial limitation of internal control, keeping control compliance, addressing control
reporting, and find out the approaches of improving the quality risk, and inspecting staff qualifications (Alzeban, 2015; Haji & Anifowose,
of financial reporting. This research implies why public 2016).
companies should realize the importance of internal control over The information system is very powerful, and the small business can
financial reporting and attach weight to it, along with assisting completely rely on this system to meet their all requirements on accounting as
well as a large part of internal control. In addition, it can provide a client IT Figure 2. Significant Factors Affecting Internal Control Over Financial Reporting (Webb, 2018)
high-speed developing non-public companies to acquire some
system for a large business. The client IT system is connected to accounting
ideas about how to build internal control and internal control
systems and computer governance system of cooperative clients. Thus, these
over financial reporting from various aspects. various computer systems form into a large system serving for accounting Discussion
data sharing and internal control operating. Due to this powerful and
innovative system serving for internal control, it may simplify the internal
control procedures, strengthen internal control function, and save huge
In this review of the literature, we compile the main findings of previous
amount of time on internal audit operating (El-Gazzar & Jacob, 2017) .
researches related to the elements that affect the quality of internal control over
From our perspective, the audit committee has the most comprehensive
financial reporting, then we analyze and classify these elements from our collected
and important function, over these three factors, overseeing the normal
materials to find out the most significant factors and also compare them. Although
operation of internal control system. The committee can discharge a large
previous researchers have analyzed the factors that related to the quality of
extent of duties to committee staff because the directors of the board are not
internal control, none of these research makes comparisons or summaries on
the employees of the company so that they can maintain their independence.
which factor affects the quality of internal control over financial reporting most.
However, the management can not achieve this because they are not fully
This research has identified the significant factors that affect the quality of
independent. In addition, the audit committee is a critical indicator of the
internal control over financial reporting in three aspects: governance, supervision
high quality corporate governance through focusing on mitigating fraud on
and evaluation, and information technology. From our perspective, the audit
financial statements, management expense and other internal control
Figure 1. Various Organizations Defining Internal Control over Financial Reporting committee has the most comprehensive and important function, over these three
problems. Although information system may increase efficiency of internal
A set of regulations, rules and standards issued by various organizations all indicate that factors, overseeing the normal operation of internal control system. The reason
the financial reporting is an essential part of the whole internal control system (The control, it can not inspect the deficiency of internal control, which is the
why we chose these three factors is that these three reasons are deeply researched
University of North Carolina at Chapel Hill, 2018). criteria to evaluate the effectiveness of this control.
by the previous studies in this field; thus, we want to further analyze and compare
these three factors in a new vision.
References We also discuss how companies sustain the quality of this system through
Alzeban, A. (2015). Influence of audit committees on internal audit conformance with internal audit standards. Managerial Auditing Journal, 30(6/7), 539-559. controlling various internal factors. This research facilitates other researchers’
De Villiers, C., Naiker, V. & Van Staden, C.J. (2011). The effect of board characteristics on firm environmental performance. Journal of Management, 37(6), 1636-1663.
Ettish, A. A., El-Gazzar, S. M., & Jacob, R. A. (2017). Integrating Internal Control Frameworks for Effective Corporate Information Technology Governance. Journal of Information Systems and Technology Management, 14(3), 361-370. understandings in this field. Moreover, with caring about the users of financial
Haji, A. A., & Anifowose, M. (2016). Audit committee and integrated reporting practice: Does internal assurance matter? Managerial Auditing Journal, 31(8/9), 915-948.
Hermanson, D. R., Smith, J. L., & Stephens, N. M. (2012). How effective are organizations' internal controls? insights into specific internal control elements. Current Issues in Auditing, 6(1), 31-50. statements including external and internal users, we also discuss the approaches
Huang, C. J. (2010). Corporate governance, corporate social responsibility and corporate performance. Journal of Management & Organization, 16(5), 641-655.
Lee, J. E. (2015). Managerial Ability and The Effectiveness of Internal Control Over Financial Reporting. Journal of Applied Business Research, 31(5), 1781-1788.
about how to improve internal control through enhancing the reporting area of
Nazari, J. A., Herremans, I. M., & Warsame, H. A. (2015). Sustainability reporting: External motivators and internal facilitators. Corporate Governance, 15(3), 375-390. internal control.
The University of North Carolina at Chapel Hill. (2018). Components of the Internal Controls Process. Retrieved from https://finance.unc.edu/departments/internal-controls/components-ic-process/
Webb, G. (2018). Audit Committees for Small Councils – Value or Not. Retrieved from http://www.reinforcements.com.au/audit-committees-for-small-councils-value-or-not/