DETERMINANTS OF THE QUALITY OF INTERNAL CONTROL OVER THE FINANCIAL REPORTING SYSTEM

Abstract

External stakeholders rely heavily on the information contained in the financial statements when making business decisions. Given the risks they take in making decisions based on this information, they expect the management to provide them with quality financial statements. In order to be able to provide such financial statements, the company’s management needs to establish quality internal control over the financial reporting system. The task of this internal control is to reduce the risks of unintentional errors in accounting records, as well as intentional manipulation of accounting information contained in financial statements. Having in mind the importance of internal control for providing reliable financial statements, the author intends to identify the determinants of the quality of internal control in this article. In order to identify these determinants, the author relies on the results of empirical research conducted in countries where companies are required to disclose information on the quality of internal control over financial statements. According to the author’s findings, the quality of internal control is influenced by a number of factors concerning the characteristics of corporate governance and the characteristics of the company in which internal control is established. When it comes to the characteristics of corporate governance, the quality of internal control over the financial reporting system is affected by the quality of the board of directors, the quality of the audit committee and the quality of internal audit. When it comes to the characteristics of the company, the author found that the quality of internal control over the financial reporting system is influenced by the ownership structure of the company, its size, age, financial stability, complexity, growth rate and the fact that the company is in the process of restructuring.