How does internal control effectiveness create reliability of financial reporting? An empirical research of Thai listed firms.

Author:Wittayapoom, Kanyamon
Position:Report - Survey

    Increasingly, reliability of financial reporting in accounting context is very important for the investors who used the information for decision management (Jenning et al., 2008). The reliability of financial reporting is effective to internal control efficiency to insure that the transactions of account bookkeeping are appropriate and properly authorized, valid, correctly record, complete, and on time. Moreover, it is very important that companies are fairly summarized of accounting information data disclosure. However, in general, a quality reporting is affected by internal control mechanism. The internal control is essential corporate governance mechanism of the firm based on internal control statement quality that it should be to control effectiveness and also influences the reliability of financial reporting both in internal and external's firm (Skaife et al, 2007) particularly in those Thai listed firms.

    Thailand is one developing country for over 800 years (Henry and Attavitkamtorn, 1999) that has fast growing economies and capital market in South East Asia. Thai Stock Market is the capital market for investors who always use a financial reporting of listed firm for decision management (SET, 2011). All Thai listed firms need internal control efficiency and effectiveness to take its role with a quality of work by employees accepted especially in accounting policies. Due to the fact that accounting policies concern firm's financial reporting, the shareholders include investors or third parties expecting a reliability of its outputs to be supportive management decision and judgment. The reliability of financial reporting is affected by the internal control that it plays roles in monitoring to safeguard the corporate culture and to increase organizational complexity (AICPA, 2003). Moreover, internal control concerns accountants that they have been aware of control systems for some time (Simons, 1987). The internal control system is used by manager for check spelling to guide in the accounting work process to achieve business objectives. Hence, successful or failed organization, particularly as of reliability of financial reporting is mainly based on internal control effectiveness.

    On the other hand, risk management efficiency is a part of the internal control effectiveness that it is very important for the firm. Risk management efficiency should be informed by shareholders how to achieve their goals. The clear and sufficient accounting policies can bring appropriate internal control effectiveness. Therefore, risk management efficiency is intended to help firms' updated rules, standard of work, guidance, and especially a quality of compliance (COSO, 2004). The outcome of risk management efficiency on the internal effectiveness is reliability of financial reporting. For the main reason, risk management is part of the business operation plan for reducing or mitigating a significant financial reporting of the firm to avoid failings or weaknesses of internal control.

    Moreover, compliance quality also influences on reliability of financial reporting by all firm's staff activities. In general, internal control practice is very important in every part of the business (Kopp and O' Donell, 2005) because internal control leads the firm to achieve their goals especially when firm benefits a compliance quality. The ultimate aim must appear on financial reporting that firm has to consider how compliance quality can be achieved with regard to the company performance goals. For one reason, at least, the company requirement is to appoint stakeholders to implement and monitor systems for achieving quality of financial reporting through internal control effectiveness. Firm should complete an internal control system and the quality of compliance monitored by manager. Including of all members of staff, audit committee, stakeholders, external auditor, and also internal auditors should be encouraged to comment upon any matters which could improve the compliance quality on the internal control effectiveness (IIA, 2006).

    Similarly, intra organization communication is also important to the firms. The intra organization communication, especially accounting policies, practical standard, guideline, or company rules should be developed and consideration could be given to two-ways communication being employed for all staff members (Carlsson et al., 2011). The communication obtains appropriate quality from staff members to managers and managers to all staff members. The potential of intra organization communication that firms are required such as completing conversation, correcting or delivered when communicate from one to another etc., (Yang and Maxwell, 2011). Therefore, senior manager should give or require staffs with a true, clear, correct, and complete information particularly in accounting information. Besides, senior manager should be including a quality of intra organization communication together with appropriate internal control practice guideline that may affect firms' reliability of financial reporting (Arel, 2010). Indeed all listed companies in Thailand are mandated by internal control and monitored by regulatory agencies to ensure efficiency, effectiveness and disclose in annual financial reporting of internal control.

    Generally, adequacy of continuous monitoring is based on internal control efficiency system especially internal auditor's responsibility. A continuous monitoring includes two steps: preliminary and final monitoring (Alles et al, 2006). The preliminary monitoring provides suggestion on how manager aim at internal control effectiveness. The continuous monitoring is at the minimum of one month after announcement news or implementing system to all staff members. The final step supports the first level by analyzing how internal control is efficient or effective. In addition, business firms are needed to achieve purpose of the firm and value added by reliability of financial reporting. However, to archive the company goal, ethical culture basically affects all member staff behavior. The ethics influence the relationships between internal control effectiveness and their goals when staff member have been under the internal control that mandates rules and regulations (Shafer, 2008). There are both positive and negative effects that influence relationships based on how manager or stakeholder motivation to include cues of information. If the information or communication is sufficient, appropriate, complete, and correct, it may make clear reliability of financial reporting via internal control effectiveness.

    As described earlier, the study views the internal control effectiveness on reliability of financial reporting based on the research question: how does internal control effectiveness create reliability of financial reporting? Besides, this research also extends prior internal control effectiveness research literature which explored the relations on the reliability of financial report. Moreover, this research also points out that there has been a lack of previous research addressing in the area of internal control effectiveness and reliability of financial reporting particularly in Thailand. Hence, this research needs a theory to be developing and creating the model so as to be adopted based upon the contingency theory. The research collected a data to analyze by quantitative research approach. Therefore objectives of this research are as follows:

    1) To examine the effects of internal control effectiveness on reliability of financial reporting,

    2) To examine the relationships between antecedent variables (risk management efficiency, quality of compliance, potential of intra communication, and continuous monitoring adequacy) and internal control effectiveness, and

    3) To examine the moderating effects of a) risk management efficiency-ethical culture relationship, b) quality of compliance-ethical culture relationship, c) potential of intra communication-ethical culture relationship, d) continuous monitoring adequacy-ethical culture relationship on internal control effectiveness, and e) internal control effectiveness-ethical culture relationship on reliability of financial reporting.

    This research is organized as follows. The first part details a literature review and theoretical to develop a conceptual framework; the second deals with the questionnaire design and measurements of variables; the third describes the research methods, statistic analysis and results; and the final describes the discussion of findings, limitations of the study, future research, and conclusions.


    This part provides conceptual model of internal control effectiveness on reliability of financial reporting including its antecedence variables relationships. The research needs to clarify how internal control effectives creates reliability of financial reporting, Moreover, the research provides insight conceptual model from previously published research that aims to examine the effects of internal control effectiveness through the mediating effects of CAE of the Thai-listed firms in Thailand.


    For theoretical development, contingency theory was applied in our research because the concept of contingency theory suggests that organizational effectiveness is related to corporate characteristics of contingencies (Chenhall, 2003). In internal audit and control context especially this research, we apply the assumption of contingency theory stemmed from the fact that the contingency factors influence internal audit control effectiveness establishment and related to reliability of financial reporting. Therefore, Figure 1 presents the first link of conceptual framework between contingent variables; and internal control effectiveness has been investigated and examined to ensure the finding (Bernard and Sweeny, 2006). The second describes the relationships between...

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