The effects of the internal control system on the risk, profitability, and compliance of the U.S. banking sector: A quantitative approach

Abstract

This is strong quantitative research investigating whether and how the components of the internal control system affect the credit risk, profitability, and compliance of the U.S. banking sector. Based on the COSO Framework, Basel Committee Frameworks, and the literature, the components of the internal controls are quantified. This quantitative nature distinguishes this study from others in this field since most of the studies up to now have investigated these topics by theoretical approaches. Eleven independent variables are analysed in three different regression models, with credit risk, profitability, and compliance being the dependent variables in each model. After cleaning the data from outliers, several tests are performed, while a panel set of data is used comprising the 210 biggest U.S. bank holding companies. Fixed-effects regression is applied in the three models, while the years under examination are the five fiscal years 2013-2017. Most of the data are taken from the proxy statements (DEF 14A) and the 10-K statements because of their qualitative nature.The key results indicate that Risk Assessment, Control Activities, and Information and Communication components strongly affect credit risk. The first (Control Environment) and last (Monitoring) components have a significant effect on credit risk, though only from the perspective of the board's number and the expertise of the audit committee, respectively. In the same line, internal controls significantly affect the profitability and compliance of U.S. banks, except for the Risk Assessment component in the first case and the Control Environment component in the second case, respectively. Control Activities component and the Information and Communication component have a significant and positive relationship with the banks' profitability, while these two components are significantly and negatively correlated with the banks' compliance.

Interdependence of Control Activities and Monitoring as Components of the Internal Control System of Manufacturing Companies in the Republic of Serbia

“…After reviewing several studies, the authors Rapani & Malim (2020, p. 963) conclude that internal control as a system is significantly related to the achieved financial performance. Koutoupis & Malisiovas (2021) show a statistically significant positive relationship between control activities and profitability and a statistically significant negative relationship between monitoring and profitability of banks. Ndiaye et al ( 2019) presented the existence of a link and the impact of the internal control system as a whole on profitability measured by ROA and ROE indicators.…”

Internal Communication Management Strategy to Increase Office Administration Effectiveness

“…Interviews and observations can be qualitative techniques used to collect this data. On the other hand, a quantitative approach is used to measure the impact of internal communication management strategies statistically through numerical data and statistical analysis (Koutoupis & Malisiovas, 2023). The population of this research is all employees of PT Hana Kreasi Utama in Jakarta.…”

Foreign ownership, subjective willing, and internal control level

“…Companies with a desire to improve internal control are more likely to foster prudent risk awareness. It will enable them to identify and address potential issues early on, thus preventing the accumulation of risks beyond control [ 57 ]. Secondly, this subjective initiative also encourages the governing body to initiate a “top-down” motivational effect, guiding management and even ordinary employees to voluntarily engage in efforts to improve internal control [ 9 ] and effectively prevent fraudulent activities, thereby creating a well-organized control environment and achieving stable and healthy development.…”