Sustaining competitive advantage through good governance and fiscal controls: Risk determinants in internal controls

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Abstract

This study conducts a comprehensive review of the literature published during 1989-2020 to identify the factors that can cause internal control weakness. This review is organized around five main groups, namely: 1) rapid growth and restructuring, 2) financial reporting complexity, 3) auditor tenure, 4) cultural differences, and 5) corporate governance. We perform an integrated literature review approach. Among the several factors found, some factors (the proportion of managerial ownership, Individualism, power distance, financial reporting complexity, rapid growth, and auditor-customer geographic distance) have a positive relationship with internal control weakness while others (the quality of the board of directors and auditing committees, directors’ compensation, and uncertainty avoidance) have a negative relationship. The findings contribute to future research by examining the factors that can cause internal control weakness from different perspectives, which will prove to be useful for investors, auditors, audit committee members, managers, and other stakeholders regarding the prevention of internal controls weaknesses through the application of solid internal controls as well as a path towards the improvement of existing problems of internal control weakness.

Keywords: Corporate Governance, Cultural Differences, Financial Reporting Complexity, Growth and Restructuring, Internal Control Weakness, Auditor Tenure

Authors’ individual contribution: Conceptualization –M.J.R. and R.K.M.; Methodology – M.J.R.; Formal Analysis – M.J.R. and R.K.M.; Investigation – M.J.R. and R.K.M.; Writing Original Draft – M.J.R.; Writing – Review & Editing – M.J.R. and R.K.M; Supervision – M.J.R.; Project Administration – M.J.R. and R.K.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G34, M42, D53

Received: 17.05.2020
Accepted: 10.09.2020
Published online: 11.09.2020

How to cite this paper: Rahman, M. J., & Marjerison, R. K. (2020). Sustaining competitive advantage through good governance and fiscal controls: Risk determinants in internal controls. Corporate Ownership & Control, 18(1), 34-46. https://doi.org/10.22495/cocv18i1art3