Impact of Internal Control on Financial Performance: Evidence from Sri Lanka

Rubasin Rathnayaka Pathiranage Madhushani and Nuradhi Kalpani Jayasiri

First, this paper aims to provide empirical evidence of relationship between the internal control and financial performance of the selected manufacturing companies. Second, it seeks to what extent the significance of each internal control component affects to the financial performance. The purpose of this paper is enabling to identify the impact of internal control on financial performance. Data were collected through an online and physical questionnaire and published annual reports of 34 manufacturing companies listed in the Colombo Stock Exchange in 2019 and analyzed using multiple regression analysis. The results indicate that, control environment, risk assessment, control activities, information and communication and monitoring of controls are not highly impacted on financial performance individually. However, internal control system consisting with all these components has a greater impact on financial performance. The research is limited only to the manufacturing sector. Future research is needed to examine the relationship between internal control system and financial performance for other sectors as well. The paper demonstrates the need for managers to be aware of the drivers of the effectiveness of the internal control system and the relationships essential to drive financial performance. While all components of an internal control system are vital, this study shows that a good fit between them can lead to improved financial performance. This is the first empirical study that has used 34 public limited companies in manufacturing sector in Sri Lankan context by employing the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework.