1. Introduction
Internal control (IC) has become the focus of attention whenever a scandal occurs, especially in the aftermath of the downfall of high-profit organizations such as Enron, Barings Bank, WorldCom, Tyco, and Ahold (
Rae and Subramaniam 2008;
Hussaini and Muhammed 2018). It has been stated that IC could be an important feature of managing an entity and defending against business failure (
IFAC 2012). In other words, the IC supports the entity based on performance and is the first defensive line utilized to protect the entity’s assets as well as prevent and detect its errors and fraud.
Globally, regulatory bodies recognize that the implementation of a proper IC system will normally provide an entity with reasonable assurance that it will improve the entity’s performance and achieve its goals. IC can be defined as an ongoing process designed by the directors’ board, chief executive officer, or other party in order to provide reasonable assurance regarding the accomplishment of the entity’s objectives (
COSO 1992). The definition of IC includes three levels of objectives that need to be achieved. The entity requires IC to focus on the effectiveness and efficiency of its organizational performance, productivity goals, and the safeguarding of its assets. Another objective of IC deals with the preparation of reliable financial and non-financial reports, including temporary, internal, external, and management reports. The last objective pertains to compliance with regulations and laws to which an organization is subject. IC is a vital feature in an organization’s structure that can be utilized to develop and deploy monitoring across the entity to ensure sound governance (
Shaiti et al. 2013). It is generally accepted that a sound IC activity can provide an organization with reasonable assurance that it can protect the entity from failure, material error, and fraud (
Turnbull 1999).
Additionally, an IC system is believed to have an influence on social, environmental, and governance ratings, which indicate organization performance (
Hamed 2023). An entity with a strong IC process will outperform one with a weak process (
Al-Thuneibat et al. 2015;
Pakurár et al. 2019;
Tao et al. 2023). Empirical evidence from Jordan shows that an IC system significantly influences financial performance and sustainability (
Hamed 2023). Therefore, IC quality is an important factor that can enhance the performance of an organization (
Tao et al. 2023). Although the current literature has examined the impact of an IC process on organizations’ performance, the conclusions are not consistent (
Hamed 2023). In addition, it is important to consider the potential influence of other factors on the IC system in order to enhance the level of IC quality. There are some prior studies that assessed the influence of different contingent factors based on different perspectives, such as (
Doyle et al. 2007;
Zhang et al. 2009;
Abbaszadeh et al. 2019), yet more studies are needed (
Doyle et al. 2007). The
Doyle et al. (
2007) developed a theoretical framework to provide evidence for the interaction between management support, risk management, the activities of internal audit, and the quality of internal control.
Zhang et al. (
2009) found an influence of financial position, organizational culture, size, management philosophy, internal auditing, and degree of decentralization on the IC system. Additionally, the authors of (
Abbaszadeh et al. 2019) found that information technology (IT) was associated with IC.
In order to fill the literature gap, this study aims to investigate the influence of IC systems on organizational performance. On one hand, this study attempts to explore the influence of five contingency factors (structure, organizational culture, strategy, top management support, and information technology factor) on IC systems. On the other hand, the study further assesses the moderator impact of an information system (IS) on the relationship between IC and organizational performance. The study relationship is explained by the contingency approach, expanding on the idea that there is no single universally ideal method or approach for leading or organizing an entity. The most suitable path to take is determined by internal or external factors; thus, better organizational performance depends on achieving a more suitable alignment between a control system and these contingent variables (
Fisher 1998). The study responds to a recent call by various studies (
Hamed 2023;
Hoai et al. 2022;
AlMuhayfith and Shaiti 2020) for further investigation to increase the understanding of the organizational and information system factors that impact IC and explain the relationship between the quality of IC and a firm’s performance. By shedding light on these relationships, the study offers useful guidance to legislators and organization leaders in developing policies that enhance longstanding performance stability and growth.
The empirical results for this paper draw three conclusions. First, formalized structure, management support, strategy, and IS quality are important factors for quality IC. Second, the IC system influences organizational performance. Third, IS quality enhances the relationship between IC and organizational performance. The remainder of this paper presents the theoretical development and hypothesis formulation, research design and data collection, data analysis and findings, discussion, implementation, future research direction, and, finally, the conclusion.
4. Data Analysis and Findings
In the first stage of the data analysis, Statistical Product and Service Solutions (SPSS) 26 software was used to process descriptive statistics to assess the respondents’ demographic characteristics (firm type, qualification, and IT brand). For the firm types listed in the questionnaire, the highest response rate came from joint liability firms (39.5%), followed by public firms (30%), whereas the lowest response rate came from private firms (6%). This implies that applying an integrated IS is not common among private firms. This is because the majority of private firms are small, and it would be costly to implement a high-quality system.
The results in
Table 2 show that most of the participants have a bachelor’s degree. Approximately 74% of the respondents have a bachelor’s degree in accounting, finance, or management, whereas 26% have a diploma degree. Thus, the respondents were relatively knowledgeable in the research area. Moreover, the results show that Saudi enterprises employ over 30 different brands of integrated IS software. According to
AlMuhayfith and Shaiti (
2020), integrated IS software can be classified by well-known systems, such as SAP, Microsoft Dynamic AX, and Oracle, and less well-known systems, such as Peachtree, Solution, and HeloolERP.
Table 2 shows that 74% of the respondents used well-known IS software, whereas only 26% used less well-known software.
In the next stage, the PLS-SEM approach was utilized to examine the correlation coefficient and assess the influences between the study’s variables (
Lee et al. 2011). Two PLS-SEM models were used for data analysis (
Hair et al. 2013). The first one is the outer model, which identified and assessed the correlation between the observation data and the latent variables. Particularly, it assessed internal consistency reliability, composite reliability, and discriminate and convergent validity. The second model was the inner model, which was used to assess the relationships between the study variables using a structure scale (
Hair et al. 2013).
4.1. The Outer Model
Before assessing the significance of the relationships among the study’s constructs, it is important to evaluate the outer or measurement model. First, the study removed all cases that had over 10% of missing data. Thus, six cases were removed. Second, the factor loading for each indicator was examined. All items loaded onto their respective constructs; however, eight items (ISQ4, ISQ5, Strategy 4, MS2, MS4, Maturity 4, Structure 3, and Performance 1) had factor loadings of less than 0.5, which added a few values to the model explanation; thus, these were removed (
Hulland 1999;
Hair et al. 2010).
Table 3 shows the factor loadings of the indicators after removing low-loading factors.
Third, Cronbach’s alpha, composite reliability, and convergent validity were assessed. As shown in
Table 3, based on the value of Cronbach’s alpha, the composite reliability for all of the constructs is above 0.7 (
Hulland 1999;
Hair et al. 2010), except for performance, whose value is less than the established criterion of 0.70. According to
Hair et al. (
2013) and
Nunnally (
1978), researchers generally consider the minimum level to be 0.70; however, lower correlations for a questionnaire item might be justifiable and acceptable. A benchmark for Cronbach’s alpha value of 0.60 and above is common in the context of IS and technology studies (
Mano et al. 2023;
Yohans et al. 2023).
Fourth, the average variance extracted (AVE) values for all the constructs are more than 0.5 degrees, which establishes convergent validity (
Fornell and Larcker 1981). Fifth, the discriminant validity was assessed utilizing the Fornell-Larcker technique (
Fornell and Larcker 1981).
Table 4 shows an agreeable level of discriminant validity, as the square roots of the AVE values are greater than the inter-latent construct correlation.
4.2. Testing the Hypotheses
After satisfactorily analyzing the outer model, the next step in PLS-SEM analysis is to assess the inner model.
Figure 2 was estimated using the SmartPLS 4 software to assess the inner model and test the hypotheses. One main standard assessment criterion is the coefficient of determination (R
2) technique. As in ordinary least squares regression (OLS), the R
2 value in PLS illustrates the proportion of the total variance of the variables that is described by the model (
Hair et al. 2013). The R
2 of the endogenous variable is the predictive power utilized to assess the inner model. It is typically the first value evaluated by researchers (
Chin 2010).
Table 3 shows that the value of R
2 for the IC quality is 0.572, which means that formalization, management support culture, strategy, and IS quality explain 57.2% of the variance in the IC quality. In addition, the R
2 for organizational performance is 0.397, which means that IC quality and the indirect effect of the study’s organizational factors explain 39.7% of the variance in organizational performance. Compared to other studies in the accounting field, such as those by (
Hartmann 2005;
Naranjo-Gil and Hartmann 2006;
Chenhall et al. 2011;
AlMuhayfith and Shaiti 2020;
Hoai et al. 2022), these R
2 values fall within an acceptable range.
Moreover, the predictive relevance technique is used in addition to the path coefficient (R
2) technique to evaluate the structure model (
Chin 2010). This technique assesses the model’s capability to predict. The predictive relevance (Q
2) results hypothesize whether the model is capable of predicting each endogenous latent variable’s indicators adequately (
Hair et al. 2013). For the study, Q
2 was assessed using the cross-validity communality, as illustrated in
Table 5, which should be greater than zero in order to indicate that the model is considered to have predictive validity.
Table 5 shows positive Q
2 results for the eight constructs, which suggests the study’s model has predictive relevance.
In addition, the software makes no distributional assumptions; thus, bootstrapping (5000 samples with replacement) was applied to test the statistical significance of each path coefficient (
Hair et al. 2013).
Table 6 presents the results for the significance of each path coefficient. Among the contingency variables, management support, organizational strategy, and formalization were found to be significantly associated with IC quality (β = 0.248, ρ = 0.000; β = 0.222, ρ = 0.015; and β = 0.302, ρ = 0.001, respectively) at a level of 0.5. Additionally, a positive and significant relationship between IS quality and IC quality was found (β = 0.316, ρ = 0.000). However, organizational culture showed no significant effect on IC quality (β = -0.045, ρ = 0.555). Furthermore, IS maturity was significantly related to IS quality (β = 0.546, ρ = 0.000). The results also showed that IC quality significantly influenced organizational performance (β = 0.563, ρ = 0.000).
The study also hypothesized that IS quality would have a moderating influence on the relationship between IC quality and organizational performance. The moderation analysis was calculated by utilizing the PLS product indicator method. As stated by
Becker et al. (
2018), in a structural model, a moderator factor can influence the strength or even the direction of the relationship between constructs. Therefore, to assess the possibility of IS quality having a moderating effect, IC quality as a predictor and IS quality as a moderator were multiplied to create an interaction construct and predict organizational performance.
Table 6 indicates that the estimated standardized path coefficients for the influence of IC quality × IS quality on organizational performance (β = 0.167; ρ = 0.043) were positive and significant at a level of 0.05. This indicates that the positive influence of IC quality on business performance is stronger when IS quality is at a high level, as shown in
Figure 3. Therefore, H8 is supported.
5. Discussion
This study developed and validated a theoretical model based on empirical data gathered within the context of the Saudi Arabian corporate environment. In particular, the study examined eight hypotheses. A regression analysis was conducted to assess the study hypotheses. Based on the findings shown in
Table 6, seven hypotheses were supported, and one was rejected. Additionally, the adjusted R
2 was 0.572 for IC quality and 0.397 for organizational performance, which fall within an acceptable range compared with those in many previous studies in the accounting field (
AlMuhayfith and Shaiti 2020;
Hoai et al. 2022;
Hamed 2023).
The findings of hypothesis testing support the proposed correlation between management support (assessed by three indicators) and IC quality in Hypothesis 1. The current study is consistent with those of (
Abernethy et al. 2010;
Doeleman et al. 2012). Both studies indicated that leadership style significantly predicts the control system. According to
Jarah et al. (
2023), an IC system is a process influenced by an entity’s managers that provides sufficient confidence about the accomplishment of the entity’s objectives. Surprisingly, the study’s results show no evidence of the impact of organizational culture (collaboration) on IC quality. This means that staff believe that individual work would be more valuable for the quality of IC than teamwork. This indicates that a high-quality IC system may be based on an individualistic workplace culture. This is consistent with
Alzeban (
2015), which indicated that individualism positively impacted the quality of internal audits.
For organizational structure, the findings showed a positive influence of formalization on IC quality. These findings are consistent with those obtained in contingency studies, which indicate that formalized and specialized structures are correlated with a sound MCS (
Hutahayan 2020;
Felício et al. 2021).
Dropulić and Rogošić (
2014) examined the term of an MCS as a package of controls and indicated that most of Croatia’s firms used formalized management control systems. Additionally,
Shafie et al. (
2019) found that organizational structure significantly impacted the effectiveness of IC.
Furthermore, for Hypothesis 4, the finding supports the authors, who argued that the acceptance of a prospector strategy would positively correlate with the field of MAS (
Abdel-Kader and Luther 2008;
Verbeeten 2010;
Rahi et al. 2022), which means that the sample firms should concentrate on features such as innovation, competitive advantage, and strategic planning. The findings are also consistent with the results of (
Jokipii 2010;
Chenhall et al. 2011).
Jokipii (
2010) showed that strategy was positively correlated with control. In more detail, a study conducted in Russia empirically examined how the organizational strategy (product differentiation) of a firm could influence the MCS dimensions. Three dimensions of the MCS were used: formal controls, organic innovative culture, and a package of controls composed of social networking. The findings indicated that strategy and product differentiation were positively associated with the three MCS dimensions (
Chenhall et al. 2011).
According to the results of the structural model, the quality of an IS positively influences that of IC. The finding is consistent with those in some studies, such as (
Morris 2011;
Valipour et al. 2012;
Monteiro and Cepêda 2021;
Jarah et al. 2023). Studies such as
Morris (
2011) document that IC weaknesses are reported less for companies that use IT systems than those who do not. These studies specify compelling proof of how an IS plays a crucial role in enhancing the quality of IC. Using qualitative data,
Valipour et al. (
2012) showed that the five COSO’s framework components were affected by the adoption of the ERPS. In addition,
Jarah et al. (
2023) found that an accounting IS, specifically system and information quality, significantly influenced an IC system by providing several methods and processes to facilitate it.
In addition, the empirical results showed a positive association between IS maturity and IS quality. This result aligns with the idea that the level of maturity could influence IS quality in varying ways (
Ragowsky et al. 2012;
Al MohamadSaleh and Alzahrani 2023). The authors of
Voordijk et al. (
2003) found that the successful implementation of the ERPS depended on the strategic role of IT, IS maturity, firm strategies, and the implementation approach. Furthermore,
Dias and Souza (
2004) illustrated that the ERPS maturity stage can be recognized as a competitive advantage for an entity. Additionally,
Suh et al. (
2017) found a moderating influence of IS maturity on the association between IS investment and the success of IS quality. They indicated that even with the existence of a robust impact of IS investment on IS quality, IS maturity, as a moderator, improved the impact of IS investment on IS success.
The main purpose of this study was to examine the impact of IC quality on organizational performance. It has been stated that IC is a fundamental feature for preventing risks and a prerequisite for successful operations and performance (
Rae and Subramaniam 2008). The current study’s findings support this argument. The results show that IC quality strongly influences organizational performance (β = 0.563, ρ = 0.000). This result is consistent with findings in previous empirical studies (
Hussaini and Muhammed 2018;
Pakurár et al. 2019;
Felício et al. 2021;
Hoai et al. 2022;
Hamed 2023).
Pakurár et al. (
2019) examined the impacts of supply-chain integration and IC on Jordanian banks’ financial performance and found them significant. They illustrated that IC is positively associated with financial performance. Consistently,
Hoai et al. (
2022) reported that IC effectiveness positively influenced firms’ performance.
Hamed (
2023) examined the effect of an IC system on the banking sector’s financial performance. It indicated that an effective IC system could be a key factor for appropriate performance.
Finally, the finding related to Hypothesis 8 indicated that IS quality moderates the relationship between IC quality and organizational performance (β = 0.167; ρ = 0.043). The results imply that even with the existence of a strong effect of IC quality on performance, IS quality as a moderator improves the impact of IC quality on firms’ performance. No previous study has illustrated this relationship. However, the findings in (
Hailu 2014;
AlMuhayfith and Shaiti 2020) partially support the current study findings. Both studies found that an IS (ERPS) influenced organizational performance.
6. Implications and Future Research Directions
Although previous studies have examined the link between an IC system and organizational performance (
Akisik and Gal 2017;
Hussaini and Muhammed 2018;
Pakurár et al. 2019;
Hoai et al. 2022;
Hamed 2023), this study could be the first to investigate the influence of IS quality as a moderator variable on the relationship between IC quality and firm performance. Additionally, the study’s findings emphasize the important role of an IC system and other contingency variables in enhancing organizational performance. Practically, this study has implications for the adoption of an IC system and its influence on organizational performance. Company managers must not only implement effective IC systems but must also consider some important factors, such as company strategy and structure, in implementing an effective IS to enhance their companies’ performance. Additionally, the findings urge companies without an IS or those planning to implement one to recognize the importance of implementing an effective IS.
This study has some limitations that justify the need for additional discussion and the opportunity to explore future research avenues. From a theoretical viewpoint, because of the complexity of the study’s structure model, the author could not identify and include all potential organizational factors that may influence the two main constructors. According to
Al-Thuneibat et al. (
2015), the influence of an IC system on organizational performance may vary depending on different organizational factors. Future research can explicitly include different factors, for example, some leadership attributes, politics, uncertainty, competition, sustainability practices (
Al-Thuneibat et al. 2015;
Hoai et al. 2022;
Rahi et al. 2022), and other organizational factors, to address their effects on the study’s main relationships.
From an empirical viewpoint, this study’s context is confined to a specific subset of Saudi entities that have implemented an IS. Future research could be enhanced by conducting research on two types of firms: IS-implemented firms and non-IS-implemented firms. This would help to compare and provide a better understanding of the relationships between the study’s variables and enhance the generalizability of the findings.
7. Conclusions
Based on the importance of the IC system and its role in enhancing the performance of an organization, this study developed a structural model of the contingency variables and IC quality that could predict an improvement in organizational performance for Saudi firms. This is a topic that has not yet been explored adequately in the literature. Therefore, the structural model was first developed, followed by an assessment of the variables that predict organizational performance. The empirical results of the structure model indicated several noteworthy observations. Firstly, the findings provided evidence that supports the impact of IC systems on organizational performance. Secondly, the results showed the effectiveness of management support, IS quality, organizational structure, and strategy on the quality of an IC system. These findings prove that top management is more interested in having a high level of IC quality. Additionally, a formalized structure provides an organization with an adequate IC system. The findings also offer evidence that supports the importance of an IS in enhancing the quality of IC. Lastly, the study illustrated the moderating effect of IS quality on the relationship between an IC system and organizational performance.