Evaluating the impact of internal control systems on organizational effectiveness

Abstract

Purpose Internal control systems are critical to an organization's efficiency and promotes the adherence to norms and rules. The purpose of this study is to evaluate the impact of internal control systems on banking industry effectiveness. Design/methodology/approach Data were collected from 15 commercial and 20 rural banks. The hypothesized relationships were supported by the data. A structural equation modeling was applied in testing the conceptual model and hypothesis. Confirmatory factor analysis was conducted to establish validity and reliability of the dimensions. Findings The results show that organizational effectiveness was significantly impacted by three dimensions of internal control systems: control activities, control environments and risk assessment. However, the impact of monitoring of control on organizational effectiveness was not significant. The results also show a nonsignificant impact of information and communication on organizational effectiveness. Research limitations/implications Since the current study concentrated on the banking sector with its distinct characteristics, the generalizability of the conclusions may be limited. Practical implications The study's findings may aid decision-makers and stakeholders in the adoption, designing and implementation of proactive internal control system to enhance operational efficiency, effectiveness and competitive advantage. Originality/value The study advances the literature by empirically evidencing that internal control systems impact organizational effectiveness.