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Efficiency of internal control: evidence from Swiss non-financial companies

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Abstract

Internal control enables companies to ensure a reliable reporting, to comply with relevant laws and standards and to ensure the efficiency and effectiveness of business processes. However, until now few empirical contributions conceptualizing and empirically investigating the efficiency of internal control have been published. This study addresses this research deficit and develops a theory-based and empirically validated efficiency construct of internal control. From a practical and scientific point of view, there is an interest to identify relevant factors that determine efficient internal control. Overall, four factors have been derived and conceptualized based on theoretical foundations and empirical evidence. By means of an extensive empirical survey of Swiss companies and subsequent structural equation modelling, numerous significant correlations between determinants of internal control efficiency and the efficiency construct have been identified. The empirical results fully confirmed the hypotheses of correlation. Thus, the findings contribute to the body of practical knowledge by deriving specific efficiency criteria and recommendations on the design of internal control to the management. In essence, design parameters from the company’s internal environment and a reduced complexity of internal control structures mainly contribute to efficiency. The efficiency of internal control itself is heavily determined by criteria of target achievement, input–output ratio, coordination efficiency as well as its potential for organizational flexibility.

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Notes

  1. In advance to the release, the new COSO IC Framework provoked amongst others the following concern: “In general, the link with COSO Enterprise Risk Management Framework is not very clear. In order to underline the link between Internal Control and risk management, risk management should be further addressed in the COSO Framework on Internal Control” (FEE 2012, p. 6). See D’Aquila (2013) for a detailed discussion on the relevant changes between COSO (1992) and COSO (2013a, b).

  2. For a similar approach in the area of risk management, see Gunkel (2010).

  3. For a detailed overview on efficiency concepts see for example Bhargava et al. (1994).

  4. See Appendix 1 for the sources used to develop the indicators in the questionnaire.

  5. Hair et al. (2014) suggest also a fifth step to assess the predictive relevance of the model (Stone-Geisser’s Q2 value). To calculate this value, blindfolding procedure is used, which is only applicable to reflectively specified endogenous latent variables. This study uses a formative endogenous IC efficiency construct, thus Stone-Geisser’s Q2 is not applicable.

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Acknowledgments

I gratefully acknowledge the financial support of the Lucerne University of Applied Sciences and Arts and the assistance and feedback of Prof Dr Michael Blankenagel. I also thank several academics and practitioners for their input on the survey. Finally, I thank the two reviewers of JM&G for their valuable and insightful comments, which have improved my manuscript substantially.

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Authors and Affiliations

  1. Institute of Financial Services Zug IFZ, Lucerne University of Applied Sciences and Arts, 6301, Zug, Switzerland

    Stefan Hunziker

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  1. Stefan Hunziker
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Correspondence to Stefan Hunziker.

Appendices

Appendix 1: Items used in the questionnaire (originally in German)

figure a
figure b
figure c

Appendix 2

See Table 4.

Table 4 Descriptive statistics of the indicators
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Hunziker, S. Efficiency of internal control: evidence from Swiss non-financial companies. J Manag Gov 21, 399–433 (2017). https://doi.org/10.1007/s10997-016-9349-1

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