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Internal Control pp 75–145Cite as

Themes and Issues

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Part of the book series: Contributions to Management Science ((MANAGEMENT SC.))

Abstract

Purpose: The purpose of this chapter is to provide an account of some of the themes and issues that are frequently taken up in writings on internal control.

Synopsis: Official definitions of internal control develop, vary and are often somewhat controversial. Both broad and narrow approaches to internal control have co-existed for a long time and some scholars have argued that defining the boundaries of internal control remains problematic. Although internal control has always had a direct relationship to the concept of risk, recent writings suggest that this relationship is now more explicit and controls are closely associated with risk management practices. There have been continuous attempts to classify and distinguish different types of internal controls. As the concept of internal control has expanded into management control and corporate governance, design issues are becoming more important. It is however difficult to examine and measure internal control quality. Internal control designs seem however to be contingent upon a number of external and internal variables, including certain regulatory environment characteristics, business culture, uncertainty and risk, objectives and strategies, risk appetite, practical frameworks and standards and firm size. The specific design objectives often applied may be management’s financial assertions or a stated risk appetite level. Existing writings on internal controls also suggest that controls need to be integrative, balanced, embedded, cost-effective and adaptive. Much has been written on the assessment and evaluation of internal control, which is unsurprising, since this constitutes a key part of the audit process. Findings suggest that internal control evaluation is part structure, part judgment. The disclosure of internal control is not a new phenomenon but is becoming increasingly important. Issues often examined include whether disclosure requirements should be voluntary or mandatory, whether they should address the effectiveness of internal controls, and also whether auditors should attest to a report on internal control. Today internal control is often referred to as a corporate governance mechanism, yet researchers have suggested that internal control from this perspective remains under-explored. Determining the outcomes of internal control may be difficult however, although prior writings on the subject not only discuss its fraud detection capabilities, risk and cost consequences but also its enabling effects on firm performance.

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Notes

  1. 1.

    For more information, review FFE (The Federation of European Accountants) (2007) which provides a detailed account. The author is grateful to Ph.D. Gunilla Eklöv Alander (econ.) formerly at the Supervisory Board of Public Accountants in Sweden and currently at Uppsala University, for providing input to this section.

  2. 2.

    The author is grateful to Ph.D. Gunilla Eklöv Alander (Ek.dr.) at the Supervisory Board of Public Accountants in Sweden for providing input on the section related to differences between Swedish and international audit standards on internal control.

  3. 3.

    Internal control activities are closely associated with what Porter (1985) refers to as quality assurance activities. These activities, according to Porter, ensure the quality of other primary core activities and include various monitoring, inspecting, reviewing, testing and checking activities (p. 44), which resembles internal controls.

  4. 4.

    From a local Swedish perspective this may not be a completely accurate statement. The Limited Liability Companies Act [SFS 2005:551 Aktibolagslagen] prescribes that the statutory audit also must include an assessment of the Board’s administration of the company. Some aspects of the internal control system is hereby audited, as prescribed by Swedish audit standard RS 209 (FAR SRS, 2009, p. 205).

  5. 5.

    As mentioned in chapter three these changes in Swedish law will also result in updates to the Swedish code of Corporate Governance (Kollegiet för Svensk Bolagsstyrning, 2009, p. 7). The now mandated corporate governance report [bolagsstyrningsrapport] must include information about the most important aspects of the entity´s systems for internal control and risk management, as it pertains to financial reporting quality. However, the new disclosure requirements that result from the implementation of the European Union accounting directive do not significantly deviate from the existing requirements already stipulated by the Swedish code. The SCGB has however signaled that, with reference to the content of the corporate governance report, it may be reasonable that the code requirements go beyond the minimum requirements of Swedish law (see Kollegiet för Svensk Bolagsstyrning, 2009, p. 8).

  6. 6.

    The requirements of Cadbury, Turnbull, Rutteman, Hampel, COSO and COCO are included in their assessment and illustration (see pp. 646–651).

  7. 7.

    Their appropriate positions have been plotted based on an assessment of the following factors: whether MRICs contain a design-statement only or whether they should address the effectiveness of the internal control system as well, whether the definition of control is confined to financial reporting quality only or whether MRICs should cover other controls as well, and whether the auditors are required to attest to the MRICs or not (based on Hermanson, 2000, p. 326).

  8. 8.

    In a recent paper on the drivers of voluntary disclosures, Boessa and Kumar (2007) note on the subject that “it has been frequently discussed that factors such as a company’s effort to gain reputation, long-term value creation, market conditions, and pressures from corporate governing bodies may also be driving the voluntary disclosure practices of companies” (p. 271). Their findings indicate that “in addition to investors’ information needs, factors such as company emphasis on stakeholder management, relevance of intangible asset, and market complexity affect both the volume as well as the quality of voluntary disclosures” (p. 269).

  9. 9.

    For a review of the concept and some of the effects that formalization may have on organizational performance, see for example studies such as Organ and Greene (1981), Dewar, Whetten and Boje (1980), House (1975), Podsakoff, Williams and Todor (1986), Hall, Johnson and Haas (1967), Agarwal (1993) and Michaels, Cron, Dubinsky and Joachimstahaler (1988). Building on earlier studies on formalization Hall, Johnson and Haas (1967) suggest that formalization “is measured by the proportion of codified jobs and the range of variation that is tolerated within the rules of defining jobs. The higher the proportion of codified jobs and the less range of variation allowed the more formalized organization” (p. 906).

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    Olof Arwinge

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Arwinge, O. (2013). Themes and Issues. In: Internal Control. Contributions to Management Science. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2882-5_5

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