The Impact of Internal Control Components on the Financial Performance, in the Iraqi Banking Sector
Journal of Contemporary Issues in Business and Government,
2021, Volume 27, Issue 3, Pages 2517-2529
AbstractThe aim of this study was to investigate the impact between Internal Control Components (ICC) and the Financial Performance (FP) of the Iraqi banking sector. The selected components were control environment, control activity, risk assessment, information & communication, and monitoring. The theoretical framework in this study was based on the Agency theory. A quantitative approach using Structural Equation Modelling (SEM) was utilised as the main study design. The data was collected from a group of respondents comprising CFO, CEO, Accountants, Internal Auditors, and Audit Committee selected through non-random purposive sampling. The actual survey questionnaire was distributed to 365 respondents, and the data were analysed using SEM to determine the impact between Internal Control Components and Financial Performance. The study results indicated that the Internal Control Components have a significant impact on Financial Performance. The positive significant relation were control activity (β =0.311, p<0.05), followed by risk assessment (β =0.203, p< 0.05), monitoring (β=0.176, p<0.05), control environment (β=0.164, p<0.05) and information & communication (β=0.157, p<0.05). In conclusion, the control activity is the most dominant ICC factor that affects financial performance. The main implication of the study is that Iraqi banks should focus on the improvement of Internal Control Components to enhance financial performance.
- Adamu, S. (2020). Impact of Internal Control System on Accounting Records Keeping in Taraba State Health Establishments. International Journal, 4(1).
- Adetiloye, K. A., Olokoyo, F. O., & Taiwo, J. N. (2016). Fraud prevention and internal control in the Nigerian banking system. International Journal of Economics and Financial Issues, 6(3), 1172–1179.
- Al_Khero, I. M. M., Janudin, S. E. Bin, Abdelhakeem, A., & Ahmed, K. (2019). The Impact of Financial Engineering on the Financial Performance in Iraqi Banks. Global Journal of Accounting and Finance, 2, 33–46.
- Al-Taie, B. M. S., & Shaker, M. (2017). Internal banking supervision requirements and their impact on the development of electronic accounting information systems applied research in a sample of Iraqi private banks. Journal of Accounting and Financial Studies, 12(40).
- Al-waeli, A. J., Hanoon, R. N., Ageeb, H. A., & Idan, H. Z. (2020). Impact of Accounting Information System on Financial Performance with the Moderating Role of Internal Control in Iraqi Industrial Companies : An Analytical Study. Jour of Adv Research in Dynamical & Control Systems, 12(8), 246–261. https://doi.org/10.5373/JARDCS/V12I8/20202471
- Al-Waeli, A. J., Ismail, Z., & Khalid, A. A. (2020). The Impact of Environmental Costs on the Financial Performance of Industrial Companies in Iraq. International Journal of Management (IJM), 11(10), 1955–1969.
- Al-Waeli, A. J., Khalid, A. A., Ismail, Z., & And Idan, H. Z. (2020). The Relationship between Environmental Disclosure and Financial Performance of Industrial companies with Using a New Theory: Literature Review. International Journal of Supply Chain Management, 9(5), 1078–1081.
- Asiligwa, M., & Rennox, G. (2017). The Effect of internal controls on the financial performance of commercial banks in Kenya. Journal of Economics and Finance, 8(3), 92–105.
- Aspal, P. K., & Dhawan, S. (2016). Camels rating model for evaluating financial performance of banking sector: A theoretical perspective. International Journal of System Modeling and Simulation, 1(3), 10–15.
- Ayagre, P., Appiah-Gyamerah, I., & Nartey, J. (2014). The Effectiveness of Internal Control Systems of Banks. The Case of Ghanaian Banks. International Journal of Accounting and Financial Reporting, 4(2), 377–389. https://doi.org/10.5296/ijafr.v4i2.6432
- Bayyoud, M. (2015). The Impact of Internal Control and Risk Management on Banks in Palestine. International Journal of Economics, Finance and Management Sciences, 3(3), 156.
- Blunden, T., & Thirlwell, J. (2012). Mastering Operational Risk: A practical guide to understanding operational risk and how to manage it. Pearson UK.
- Central Bank of Iraq. (2017). Central Bank of Iraq (CBI) signed the Audit Committee Charter.
- Chin, W. W. (1998). The partial least squares approach to structural equation modelling. In Marcoulides G. A. (Ed.). Modern Methods for Business Research, 295(2), 295–336.
- Compeau, D., Higgins, C. A., & Huff, S. (1999). Social cognitive theory and individual reactions to computing technology: A longitudinal study. MIS Quarterly: Management Information Systems, 23(2), 145–158. https://doi.org/10.2307/249749
- COSO. (2013). The COSO Internal Control Framework. In Brink’s Modern Internal Auditing (Vol. 7). https://doi.org/10.1002/9781119180012.ch3
- Flamini, V., McDonald, C. A., & Schumacher, L. B. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa. In IMF Working Papers.
- Fornell, C., & Larcker, D. F. (1981). SEM with Unobservable Variables and Measurement Error: Algebra and Statistics. Journal of Marketing Research, Vol. 18, pp. 382–388.
- Hair, J. F., Hult, G. T. M., Ringle, C. M., Sarstedt, M., & Thiele, K. O. (2017). Mirror, mirror on the wall: a comparative evaluation of composite-based structural equation modeling methods. Journal of the Academy of Marketing Science, 45(5), 616–632.
- Hanoon, R. N., Rapani, N. H. A., & Khalid, A. A. (2020a). The correlation between internal control components and the financial performance of iraqi banks a literature review. Journal of Advanced Research in Dynamical and Control Systems, 12(4), 957–966.
- Hanoon, R. N., Rapani, N. H. A., & Khalid, A. A. (2020b). THE RELATIONSHIP BETWEEN AUDIT COMMITTEE AND FINANCIAL PERFORMANCE : EVIDENCE FROM IRAQ. International Journal of Management (IJM), 11(11), 564–585. https://doi.org/10.34218/IJM.11.11.2020.054
- Hassan, W. A. A., & Al-Amiri, A. H. A. (2020). The impact of control environment on Quality of Banking Service An applied research in a sample of Iraqi private banks. Journal of Baghdad College of Economic Sciences University, 4(59).
- Hayali, Y. H. I. M. (2014). Economics of Environment and Sustainable Development. Tikrit Journal of Administration and Economics Sciences, 10(31).
- Henseler, J., Dijkstra, T. K., Sarstedt, M., Ringle, C. M., Diamantopoulos, A., Straub, D. W., … Calantone, R. J. (2014). Common beliefs and reality about PLS: Comments on Rönkkö and Evermann (2013). Organizational Research Methods, 17(2), 182–209.
- Hiraoka, L. S. (2017). Underwriting the Internet: How Technical Advances, Financial Engineering, and Entrepreneurial Genius are Building the Information Highway. ME Sharpe.
- Idan, H. Z., Hanani, N., Rapani, A., & Khalid, A. A. (2021). The Effect of Corporate Governance Attributes on Corporate Social Responsibility Disclosure in Iraqi Companies: A Literature Review. Journal of Contemporary Issues in Business and Government, 27(2), 2778–2815. https://doi.org/10.47750/cibg.2021.27.02.291
- Inoue, S., Magara, T., Pandey, V. S., Shiota, D., Kusano, K., Choe, G. S., & Kim, K. S. (2013). Nonlinear force-free extrapolation of the coronal magnetic field based on the magnetohydrodynamic relaxation method. The Astrophysical Journal, 780(1), 101.
- Iqbal, N., Ahmad, N., Hamad, N., Bashir, S., & Sattar, W. (2014). Corporate social responsibility and its possible impact on firm’s financial performance in banking sector of Pakistan. Arabian Journal of Business and Management Review (Oman Chapter), 3(12), 150.
- Ireri, S. K., & Wagoki, J. (2014). Assessing the Role of Internal Control Systems Components in Kenyan Public Universities: A case of Jomo Kenyatta University of Agriculture and Technology. Journal of Accounting and Financial Management, 4(3), 17–28.
- Janvrin, D. J., Payne, E. A., Byrnes, P., Schneider, G. P., & Curtis, M. B. (2012). The updated COSO Internal Control—Integrated Framework: Recommendations and opportunities for future research. Journal of Information Systems, 26(2), 189–213.
- Jensen, K. L., & Payne, J. L. (2003). Management Trade‐Offs of Internal Control and External Auditor Expertise. Auditing: A Journal of Practice & Theory, 22(2), 99–119.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
- Kemboi, E. K. (2019). Effect of Internal Controls on Operational Efficiency of Saccos Registered by Sacco Society Regulatory Authority in Nairobi County. Doctoral Dissertation, University of Nairobi, 1(21), 300.
- Kim, J.-B., Song, B. Y., & Zhang, L. (2011). Internal control weakness and bank loan contracting: Evidence from SOX Section 404 disclosures. The Accounting Review, 86(4), 1157–1188.
- Mawanda, S. P. (2008). Effects of internal control system on financial performance in Uganda’s institution of higher learning (p. 200). p. 200. Dissertation for award of MBA in Uganda Martyrs University.
- Muraleetharan, P. (2011). Internal control and impact of financial performance of the organizations (special reference public and private organizations in jaffna district). Intemational Conference on Business & Information [C/OL].
- Ndamenenu, K. D. (2011). Internal control and its contributions to organisational efficiency and effectiveness: a case study of ECOBANK Ghana Limited. Unpublished Dissertation for the Award of a Master Degree Commonwealth Executive Master of Business Administration of Kwame Nkrumah University of Science and Technology.
- Ndiwa, C. K., & Kwasira, J. (2014). An assessment of Internal Controls system of financial performance in tertiary training institutions in Kenya. International Journal of Science and Research 3 (3) 571, 573(4), 5.
- Njonde, J. N., & Kimanzi, K. (2014). Effect of integrated financial management information system on performance of public sector: A case of Nairobi County Government. International Journal of Social Sciences and Entrepreneurship, 1(12), 913–936.
- Nunnally, J. C. (1978). Phychometric theory. Psychometric Theory, 22(5), 47.
- Nyakundi, D. O., Nyamita, M. O., & Tinega, T. M. (2014). Effect of internal control systems on financial performance of small and medium scale business enterprises in Kisumu City, Kenya. International Journal of Social Sciences and Entrepreneurship, 1(11), 719–734.
- Organization, W. H. (1993). Implementation of the global malaria control strategy: report of a WHO Study Group on the Implementation of the Global Plan of Action for Malaria Control 1993-2000 [meeting held in Geneva from 8 to 12 February 1993]. World Health Organization.
- Pany, K. J., & Whittington, O. R. (2001). Research implications of the Auditing Standard Board’s current agenda. Accounting Horizons, 15(4), 401.
- Article View: 181
- PDF Download: 2,172