Efficiency of internal control: evidence from Swiss non-financial companies
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Efficiency of internal control: evidence from Swiss non-financial companies Stefan Hunziker1
Springer Science+Business Media New York 2016
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 theorybased 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. Keywords modeling
Internal control Efficiency Swiss companies Structural equation
& Stefan Hunziker [email protected] 1
Institute of Financial Services Zug IFZ, Lucerne University of Applied Sciences and Arts, 6301 Zug, Switzerland
123
S. Hunziker
1 Introduction Internal control (IC) is a broad concept that covers the entire range of procedures, methods and controls established by an organisation for the purpose of increasing the probability to achieve its business goals (The IAA 2009). It further helps to ensure reliable financial reporting information and that a company complies with laws and regulations (COSO 2013a, b). Due to legal changes of the Swiss Code of Obligation, Swiss listed companies and companies of economic significance are obliged to implement and maintain IC for annual periods beginning on or after 1 January 2008. According to Article 728 of the Swiss Code of Obligations, companies that are subject to an external full scope audit are required to demonstrate the existence of IC, regardless of the company’s legal form. However, Swiss legislators have not formulated specific requirements covering the design and scope of IC (Swiss Code of Obligations, Art. 728). For this reason, the Swiss Fiduciary Chamber published an auditing standard (AS 890) in 2007. It is applicable to all audits in w
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