Internal Control and Operational Efficiency

50 Pages Posted: 18 Jan 2017

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: January 16, 2017

Abstract

In this study, we examine whether internal control over financial reporting affects firm operational efficiency. We find that operational efficiency, derived from frontier analysis, is significantly lower among firms with material weaknesses in internal control relative to firms without such weaknesses. We also find that the remediation of material weaknesses leads to an improvement in operational efficiency. Additional analyses indicate that the negative effect of material weaknesses on operational efficiency is stronger for firms with a greater demand for higher quality information for decision making, for weaknesses that are deemed to be more severe, and to a certain extent, for smaller firms. Overall, our study extends the literature by presenting systematic evidence on the effect of effective internal control on operational efficiency and informs the debate over the costs and benefits of the internal control reporting requirements under the Sarbanes-Oxley Act of 2002.

Keywords: Internal control, operational efficiency, internal information environment, 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 (January 16, 2017). Contemporary Accounting Research, Forthcoming, Singapore Management University School of Accountancy Research Series Vol. 6, No. 3 Paper No 2018-84, Available at SSRN: https://ssrn.com/abstract=2900076

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Beng Wee Goh

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

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