Internal Control and Operational Efficiency

55 Pages Posted: 8 Jun 2013 Last revised: 15 Dec 2014

See all articles by Qiang Cheng

Qiang Cheng

Singapore Management University

Beng Wee Goh

Singapore Management University - School of Accountancy

Jae B. Kim

Lehigh University - College of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2014

Abstract

In this study, we examine whether and how internal control over financial reporting affects firm operational efficiency. We find that operational efficiency, derived from the frontier analysis, is significantly lower among firms with material weaknesses in internal control relative to firms without such weaknesses. We document some evidence suggesting that effective internal control leads to greater operational efficiency through reducing the likelihood of misappropriation of corporate resources and through enhancing the quality of internal reports for decision making. We also document that smaller firms benefit more from having effective internal control in terms of operational efficiency. In addition, we find that the market appears to understand the effect of ineffective internal control on operational efficiency: within firms with internal control material weakness, those with more negative market reaction experience a larger deterioration in operational efficiency. Lastly, we find that the firms that remediate their material weaknesses subsequently experience an improvement in operating performance and stock returns, and this effect is mainly driven by the improvement in operational efficiency. Overall, our study extends the literature by presenting systematic evidence on the effects of effective internal control on operational efficiency and firm performance.

Keywords: Internal control, operational efficiency, Sarbanes-Oxley Act

JEL Classification: G30, L20, M10, M41

Suggested Citation

Cheng, Qiang and Goh, Beng Wee and Kim, Jae Bum, Internal Control and Operational Efficiency (August 15, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2275753 or http://dx.doi.org/10.2139/ssrn.2275753

Qiang Cheng

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Beng Wee Goh (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Jae Bum Kim

Lehigh University - College of Business & Economics

621 Taylor Street
Bethlehem, PA 18015
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
719
Abstract Views
4,523
rank
14,967
PlumX Metrics