Abstract:
Contemporary Sri Lankan companies confront various challenges in the business
environment, such as technology advancement, global competition, public policies
and regulations, etc. Accordingly, business organizations are required to
implement Internal Control Systems (ICS) that provide effective solutions to
address these complex business challenges that arise in a highly competitive and
challenging environment. Thus, in terms of listed companies in Sri Lanka, the study
initially assessed the level of the Internal Control Systems. Secondly, it examined
the impact of the Internal Control Systems on financial performance using the
COSO Model. The study followed a deductive research approach and a sample of
165 companies derived from the Sri Lankan companies listed in the Colombo
Stocks Exchange based on a stratified systematic sampling technique. Primary data
was collected through a self-administered questionnaire. One sample t-test was
conducted to assess the level of the internal control system. Then, Multiple
regression analysis was used to examine the impact of Internal Control Systems on
financial performance. Findings indicated that the firms maintain effective Internal
Control Systems within the organizations since there is a significant mean
difference of 1.158 (test value of 3) with a mean value of 4.158 (out of 5) on an
overall basis. Specifically, Internal Control Systems are effective in Control
Environment, Control Activities, Risk Assessment, Information and
Communication, and Monitoring Activities. Interestingly, as per the correlation
analysis, dimensions of Internal Control Systems were positively correlated with
financial performance. However, multiple regression analysis indicated that
control environment, information and communication, and monitoring have a
significant impact. In contrast, control activities and risk assessment displayed an
insignificant impact on financial performance since Sri Lankan companies mostly
focus on the overall internal control system rather than on specific elements of ICS.
These findings suggested extensive policy implications for companies in
implementing Internal Control Systems.
