ABSTRACT


Jokipii, Annukka (2006). The structure and effectiveness of internal
control: A contingency approach. Acta Wasaensia No. 166, 160 p.

In order to ensure the efficiency and effectiveness of activities,
reliability of information and compliance with applicable laws and
regulations organizations need adequate internal control. With this wide
definition internal control is understood as an integral component of an
organization’s governance structure. However, the current state of
internal control research is incoherent and most recent studies focus
only on relatively narrow segments of internal controls.

In this study the objective is to examine research hypotheses focused on
contingency characteristics that may affect internal control structure
and its effectiveness. The research objective is based on contingency
theory, where it is stated that the design of control depends on the
organization’s context and that an appropriate fit between the
organization’s context and control leads to better effectiveness. This
statement concurs with those internal control frameworks that assume
that the need for internal control varies by organizational
characteristics. To attain a more holistic view on the issue, this study
considers the internal control structure and its effectiveness not as
single controls, but as a control package. Moreover, internal control
structure and its effectiveness are operationalized as latent variables.

The data used in this study were gathered from Finnish firms using a
web-based survey method. A total of 741 CEOs responded to the
questionnaire (response rate 50.4%). The data were analyzed using
structural equation modeling technique.

The results of this study show that in the mediation model prospector
strategy and high perceived environmental uncertainty have a
statistically significant effect on internal control structure. Internal
control structure plays a mediating role between these contingency
characteristics and internal control effectiveness. The results also
reveal statistically significant differences between the mean values of
the latent variables in alternative multi-groups. In moderation model no
significant results were found which confirms the results given by
mediation model. Thus, among the contingency characteristics examined,
the prospector strategy and high perceived uncertainty were the most
important characteristics affecting internal control structure and its
effectiveness.

Annukka Jokipii, University of Vaasa, Faculty of Business Studies,
Department of Accounting and Finance, P.O. Box 700, FI-65101 Vaasa, Finland.


Key words: internal control, contingency theory, structural equation
modeling