Investigation of the Influence of Internal Control System Factors on the Financial Stability of Companies (Review)

Abstract

The quality of internal control systems can have a significant impact on decision-making by users of financial information as well as on the financial position of organisations and on negative economic consequences of economic activity (bankruptcy, fictitious audit reports, etc.). The tools for ensuring the financial stability and solvency of a company are largely determined by the processes developed, implemented and maintained within its internal control system. In turn, the quality of the internal control system and its ability to respond quickly to emerging threats to reduce financial stability depend on external and internal factors affecting the system itself. We believe that negative consequences are typical for Russian organisations due to the insufficient study of these factors. The goal of this paper is to investigate the influence of the external and internal factors of internal control systems on the financial stability and solvency of Russian organisations based on a review of foreign publications. This paper has the following targets: (a) identifying the external and internal factors of internal control systems based on a review of foreign studies of the determinants of internal control systems, (b) identifying the characteristic factors of Russian organisations and (c) developing a methodology for assessing the dependence (relationship) between the characteristic factors of internal control systems and the financial indicators of Russian organisations. Our research hypothesis is that the high level of economic crimes, bankruptcies and other negative economic consequences of low financial stability and solvency of organisations in Russia is due to the weak elaboration of factors affecting the internal control systems of organisations. To achieve our research goal, we conducted a systematic review of foreign (Chinese, US and European) publications. The selection criteria for publications were indexability in Scopus and the Web of Science and ranking by citation level. Our research question was the influence of external and internal factors on the quality of the internal control systems of organisations. We began our literature review with the year 2014 which witnessed the appearance of studies of the results of a ten-year application of the COSO Concept: Internal Control and the Sarbanes-Oxley Act. The literature review allowed us to identify the external and internal factors affecting the internal control systems of foreign organisations. This separation is due to the fact that internal factors depend, as a rule, on the activities of the organisation, which can manage them in order to improve the quality of its internal control system and influence financial stability and solvency. External factors do not depend on the activities of the organisation, and the task of the management is to monitor risks and to respond to changes in the external environment promptly in order to minimize the negative impact on the quality of the internal control system. Russian companies do not publish similar reports on the quality of their internal control system, which represents a significant limitation of our research. We identify the following characteristic factors for Russian organisations: external audit, state, and market factors (external factors) and the characteristics of the management board, the CEO and the board of directors, the ownership structure, and the organisation of the internal control / audit system (internal factors). In addition, the prospects for studying the impact of these factors on the internal control systems and the financial stability and solvency of organisations are outlined. A methodology for assessing the dependence (relationship) between the factors of the internal control systems and the financial indicators of Russian organisations is developed.