Internal Control and Operational Efficiency
50 Pages Posted: 18 Jan 2017
Date Written: January 16, 2017
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: Suggested Citation