IDEAS home Printed from https://ideas.repec.org/a/wly/corsem/v30y2023i1p384-401.html
   My bibliography  Save this article

A need for assurance: Do internal control systems integrate environmental, social, and governance factors?

Author

Listed:
  • Murad Harasheh
  • Roberta Provasi

Abstract

In the article, we provide an original linkage between the corporate environmental, social, and governance (ESG) rating and the cost of internal control system (ICSC) stemmed from two closely related frameworks: the 2017 CoSO Framework, which calls to strengthen internal control systems to integrate ESG issues, and the EU directive on nonfinancial reporting (2014/95/EU) that entered into force in 2017. Thus, we evaluate both introductions showing ESG integration in the internal control activities. We cover firms listed on Milan Exchange from 2016 to 2019, providing a thorough analysis with robustness tests. The findings imply that firms should consider both ESG rating and the internal control system cost as strategic corporate tools for value enhancement; therefore, companies should allocate the resources appropriately to internal control activities to incorporate ESG issues and create value since internal control provides the first assurance for ESG integration. The limitations of this study pave the way for further research directions; incorporating the new amendment of the EU directive on nonfinancial disclosure, allowing for a better valuation creation assessment; and whether there is a substitution between sustainability performance and other corporate issues such as taxes and marketing expenditure.

Suggested Citation

  • Murad Harasheh & Roberta Provasi, 2023. "A need for assurance: Do internal control systems integrate environmental, social, and governance factors?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(1), pages 384-401, January.
    • Handle: RePEc:wly:corsem:v:30:y:2023:i:1:p:384-401
    DOI: 10.1002/csr.2361
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/csr.2361
    Download Restriction: no
    File URL: https://libkey.io/10.1002/csr.2361?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Wanda A. Wallace & Richard W. Kreutzfeldt, 1991. "Distinctive characteristics of entities with an internal audit department and the association of the quality of such departments with errors," Contemporary Accounting Research, John Wiley & Sons, vol. 7(2), pages 485-512, March.
    2. repec:eme:maj000:02686901111142530 is not listed on IDEAS
    3. Mihret, Dessalegn Getie, 2014. "How can we explain internal auditing? The inadequacy of agency theory and a labor process alternative," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 25(8), pages 771-782.
    4. Yousef Jahmani & Suman Niranjan, 2015. "Earnings Management, Weak Internal Controls, And Firm Size," Accounting & Taxation, The Institute for Business and Finance Research, vol. 7(2), pages 51-64.
    5. Hollis Ashbaugh‐Skaife & Daniel W. Collins & William R. Kinney Jr & Ryan Lafond, 2009. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 1-43, March.
    6. Maurizio Rija & Franco Ernesto Rubino, 2018. "The Internal Control Systems Integrated into the Various Profiles of Governance, Audit, Risk and Compliance," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(5), pages 1-21, March.
    7. Dong Yang Hao & Guo You Qi & Jing Wang, 2018. "Corporate Social Responsibility, Internal Controls, and Stock Price Crash Risk: The Chinese Stock Market," Sustainability, MDPI, vol. 10(5), pages 1-22, May.
    8. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    9. Marc Eulerich & Jörg Henseler & Annette G. Köhler, 2017. "The internal audit dilemma – the impact of executive directors versus audit committees on internal auditing work," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 32(9), pages 854-878, November.
    10. repec:eme:maj000:02686900610703787 is not listed on IDEAS
    11. Angelo Baglioni & Luca Colombo, 2013. "The efficiency view of corporate boards: theory and evidence," Applied Economics, Taylor & Francis Journals, vol. 45(4), pages 497-510, February.
    12. Jacoby, Gady & Li, Yingqi & Li, Tianze & Zheng, Steven Xiaofan, 2018. "Internal control weakness, investment and firm valuation," Finance Research Letters, Elsevier, vol. 25(C), pages 165-171.
    13. Ja Eun Koo & Eun Sun Ki, 2020. "Internal Control Personnel’s Experience, Internal Control Weaknesses, and ESG Rating," Sustainability, MDPI, vol. 12(20), pages 1-16, October.
    14. Marcello Bianchi & Angela Ciavarella & Valerio Novembre & Rossella Signoretti, 2011. "Comply or Explain: Investor Protection Through the Italian Corporate Governance Code," Journal of Applied Corporate Finance, Morgan Stanley, vol. 23(1), pages 107-121, January.
    15. Xiao Li & Chunmei Zheng & Gang Liu & Muhammad Safdar Sial, 2018. "The Effectiveness of Internal Control and Corporate Social Responsibility: Evidence from Chinese Capital Market," Sustainability, MDPI, vol. 10(11), pages 1-18, November.
    16. repec:eme:maj000:02686909710180670 is not listed on IDEAS
    17. repec:eme:maj000:maj-08-2016-1435 is not listed on IDEAS
    18. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 193-223, September.
    19. repec:eme:maj000:02686909410071133 is not listed on IDEAS
    20. Paul André & GéRaldine Broye & Christopher Pong & Alain Schatt, 2016. "Are Joint Audits Associated with Higher Audit Fees?," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 245-274, June.
    21. Andrew D. Chambers & Marjan Odar, 2015. "A new vision for internal audit," Managerial Auditing Journal, Emerald Group Publishing, vol. 30(1), pages 34-55, January.
    22. Nikos Vafeas & James Waegelein, 2007. "The association between audit committees, compensation incentives, and corporate audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 28(3), pages 241-255, April.
    23. Barua, Abhijit & Rama, Dasaratha V & Sharma, Vineeta, 2010. "Audit committee characteristics and investment in internal auditing," Journal of Accounting and Public Policy, Elsevier, vol. 29(5), pages 503-513, September.
    24. Roberta Provasi & Murad Harasheh, 2021. "Gender diversity and corporate performance: Emphasis on sustainability performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(1), pages 127-137, January.
    25. Sarah C. Rice & David P. Weber, 2012. "How Effective Is Internal Control Reporting under SOX 404? Determinants of the (Non‐)Disclosure of Existing Material Weaknesses," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 811-843, June.
    26. Habiba Al‐Shaer & Mahbub Zaman, 2018. "Credibility of sustainability reports: The contribution of audit committees," Business Strategy and the Environment, Wiley Blackwell, vol. 27(7), pages 973-986, November.
    27. repec:eme:maj000:maj-08-2014-1073 is not listed on IDEAS
    28. Alessandro Cortesi & Patrizia Tettamanzi & Fabio Corno, 2009. "Empirical evidence on internal control systems and corporate governance in Italy," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 13(1), pages 75-100, May.
    29. Rizzotti, Davide & Greco, Angela M., 2013. "Determinants of Board of Statutory Auditor and Internal Control Committee Diligence: A Comparison Between Audit Committee and the Corresponding Italian Committees," The International Journal of Accounting, Elsevier, vol. 48(1), pages 84-110.
    30. Ho, Sandra & Hutchinson, Marion, 2010. "Internal audit department characteristics/activities and audit fees: Some evidence from Hong Kong firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 19(2), pages 121-136.
    31. Rainer Lenz & Gerrit Sarens, 2012. "Reflections on the internal auditing profession: what might have gone wrong?," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(6), pages 532-549, June.
    32. repec:eme:maj000:02686901211236382 is not listed on IDEAS
    33. Lois Munro & Jenny Stewart, 2011. "External auditors' reliance on internal auditing: further evidence," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(6), pages 464-481, June.
    34. Corbella, Silvano & Florio, Cristina & Gotti, Giorgio & Mastrolia, Stacy A., 2015. "Audit firm rotation, audit fees and audit quality: The experience of Italian public companies," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 25(C), pages 46-66.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huang, Jun & Han, Feifei & Li, Yun, 2023. "Government as major customer: The effects of government procurement on corporate environmental, social, and governance performance," Finance Research Letters, Elsevier, vol. 54(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mélanie Roussy & Alexandre Perron, 2018. "New Perspectives in Internal Audit Research: A Structured Literature Review," Accounting Perspectives, John Wiley & Sons, vol. 17(3), pages 345-385, September.
    2. Deng, Kebin & Hu, Fang & Tian, Gary Gang & Zhong, Ziying, 2022. "Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    3. Elsayed, Mohamed & Elshandidy, Tamer, 2021. "Internal control effectiveness, textual risk disclosure, and their usefulness: U.S. evidence," Advances in accounting, Elsevier, vol. 53(C).
    4. Chang, Yu-Tzu & Chen, Hanchung & Cheng, Rainbow K. & Chi, Wuchun, 2019. "The impact of internal audit attributes on the effectiveness of internal control over operations and compliance," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 1-19.
    5. Dunli Zhang & Ting Zhang & Guanghua Ma, 2020. "Can non‐executive equity incentives reduce internal control ineffectiveness? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4467-4496, December.
    6. Cheng, Mei & Dhaliwal, Dan & Zhang, Yuan, 2013. "Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 1-18.
    7. Like Jiang & Paul André & Chrystelle Richard, 2018. "An international study of internal audit function quality," Accounting and Business Research, Taylor & Francis Journals, vol. 48(3), pages 264-298, April.
    8. Chen, Hanwen & Yang, Daoguang & Zhang, Joseph H. & Zhou, Haiyan, 2020. "Internal controls, risk management, and cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    9. Niluthpaul Sarker & S. M. Khaled Hossain, 2023. "Ownership Structure and Financial Distress: Investigating the Moderating Effect of Audit Quality," International Journal of Economics and Financial Issues, Econjournals, vol. 13(6), pages 187-202, November.
    10. Ge, Weili & Koester, Allison & McVay, Sarah, 2017. "Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms’ internal control disclosures," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 358-384.
    11. Margaret A. Abernethy & Wei Li & Yunyan Zhang & Hanzhong Shi, 2023. "Firm culture and internal control system," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3095-3123, September.
    12. Chernobai, Anna & Yasuda, Yukihiro, 2013. "Disclosures of material weaknesses by Japanese firms after the passage of the 2006 Financial Instruments and Exchange Law," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1524-1542.
    13. Achraf Guidara & Imen Achek & Saida Dammak, 2016. "Internal Control Weaknesses, Family Ownership and the Cost of Debt: Evidence from the Tunisian Stock Exchange," Journal of African Business, Taylor & Francis Journals, vol. 17(2), pages 148-166, May.
    14. Stefan Hunziker, 2017. "Efficiency of internal control: evidence from Swiss non-financial companies," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(2), pages 399-433, June.
    15. Ji, Xu-dong & Lu, Wei & Qu, Wen, 2015. "Determinants and economic consequences of voluntary disclosure of internal control weaknesses in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(1), pages 1-17.
    16. Sean T. McGuire & Stevanie S. Neuman & Sarah C. Rice, 2020. "Interim Effective Tax Rate Estimates and Internal Control Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 603-633, March.
    17. Thiéry, Stéphanie & Lhuillery, Stephane & Tellechea, Marion, 2023. "How can governance, human capital, and communication practices enhance internal audit quality?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 52(C).
    18. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    19. Manhwa Wu & Paoyu Huang & Yensen Ni, 2020. "The Impact of Institutional Shareholdings on Price Limits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 343-361, September.
    20. Baolei Qi & Liuchuang Li & Qing Zhou & Jinghui Sun, 2017. "Does internal control over financial reporting really alleviate agency conflicts?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1101-1125, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:corsem:v:30:y:2023:i:1:p:384-401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1535-3966 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.