The Impact of Internal and External Factors that Affect the Effectiveness of the Internal Control System Mediated by Ethical Leadership: a Malaysian Perspective

Teh, Kai Li (2022) The Impact of Internal and External Factors that Affect the Effectiveness of the Internal Control System Mediated by Ethical Leadership: a Malaysian Perspective. Final Year Project (Masters), Tunku Abdul Rahman University College.

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Abstract

The internal control system has become a topic of discussion and a critical component of corporate governance whenever a corporate scandal has occurred. Specifically in Malaysia, several barriers and problems have been experienced due to the increase of corporate fraud and corruption cases in companies. The outbreak of the COVID-19 pandemic has challenged the crisis reaction of companies toward the internal control system to deal with significant emergencies. This has brought up the importance of internal control system effectiveness in the companies to limit the danger of fraud and corruption as well as tighten their internal control. However, previous studies conduct their research regarding the factors that affect the effectiveness of the internal control system are based on the COSO framework. They did not dive into the contingency characteristics and other factors that will help to analyze and redesign the companies’ internal control system. With that, this study employed the theories of contingency and agency by investigating the impact of contingencies characteristics (environmental uncertainty, organizational structure, and organizational culture) and gender diversity on the effectiveness of the internal control system, with the mediating role of ethical leadership. A quantitative and cross-sectional study was conducted by surveying 232 employees from various private and public sectors in Malaysia in order to achieve the objectives of this study. The collected data is then analyzed using the Statistical Package for Social Sciences (SPSS) and Partial Least Square – Structural Equation Modeling with SmartPLS. The research results of these findings reveal that there is a significant positive impact of all the contingency characteristics (environmental uncertainty, organizational structure, and organizational culture) on the internal control system effectiveness in private and public sectors in Malaysia. This research also concluded that ethical leadership plays an important role in mediating the relationship between organizational culture and gender diversity on internal control system effectiveness. However, the research results found that gender diversity does not have a direct impact on internal control system effectiveness. The research provides new insight into the effectiveness of the internal control system by providing a deeper understanding of how contingencies characteristics and gender diversity influence internal control system effectiveness, as well as how ethical leadership intervenes in the relationship of organizational culture and gender diversity on internal control system effectiveness. The research implications, limitations, and future research directions are highlighted in this study.