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Internal Control Personnel’s Experience, Internal Control Weaknesses, and ESG Rating

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  • Ja Eun Koo

    (Division of Business Administration, The University of Suwon, Gyeonggi 18323, Korea)

  • Eun Sun Ki

    (Division of Business Administration & Accounting, Kangwon National University, Chuncheon 24341, Korea)

Abstract

Effective internal control is expected to have a positive effect on Environmental, Social, and Governance (ESG) ratings, which are an indicator of corporate sustainability, as it ensures improvements in efficiency and effectiveness in operations, reliable reports, and compliance with applicable laws and regulations. However, no matter how well an internal control system is designed, internal control quality deteriorates if internal control (IC) personnel do not understand the firm’s business or lack accounting experience. This study first explores the relationship between ESG ratings and internal control weaknesses (ICWs). We then examine two types of career experience of IC personnel—length of service and accounting experience—and their effect on ICWs. We conduct logit regression analyses using the data of 1876 non-financial listed firms in Korea. The results show that ICW firms have low ESG ratings. We also find that the accounting experience of IC personnel is more closely related to ICWs than the length of service. This implies that the accounting expertise of IC personnel may have a greater effect on internal control quality than the understanding of a firm’s business. Overall, our findings provide evidence that firms must have IC personnel with sufficient accounting expertise for sustainable management.

Suggested Citation

  • Ja Eun Koo & Eun Sun Ki, 2020. "Internal Control Personnel’s Experience, Internal Control Weaknesses, and ESG Rating," Sustainability, MDPI, vol. 12(20), pages 1-16, October.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:20:p:8645-:d:430997
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