A need for assurance: Do internal control systems integrate environmental, social, and governance factors?

Abstract

In the article, we provide an original linkage between the corporate environmental, social, and governance (ESG) rating and the cost of internal control system (ICSC) stemmed from two closely related frameworks: the 2017 CoSO Framework, which calls to strengthen internal control systems to integrate ESG issues, and the EU directive on nonfinancial reporting (2014/95/EU) that entered into force in 2017. Thus, we evaluate both introductions showing ESG integration in the internal control activities. We cover firms listed on Milan Exchange from 2016 to 2019, providing a thorough analysis with robustness tests. The findings imply that firms should consider both ESG rating and the internal control system cost as strategic corporate tools for value enhancement; therefore, companies should allocate the resources appropriately to internal control activities to incorporate ESG issues and create value since internal control provides the first assurance for ESG integration. The limitations of this study pave the way for further research directions; incorporating the new amendment of the EU directive on nonfinancial disclosure, allowing for a better valuation creation assessment; and whether there is a substitution between sustainability performance and other corporate issues such as taxes and marketing expenditure.

Recent advances in internal control: Soft control overcoming the limits of hard control

“…On many occasions, failure to meet high financial expectations such as revenue targets often necessitates corrective actions like pay cuts, bonus reductions, or even demotion. Controls are relevant for maintaining consistency of performance, minimizing organizational risks, and overcoming threats of fraud, misappropriation, and bad governance [20]. However, hard controls are not always effective because organizational risks are evolving and changing rapidly, and systems of controls need to change in equal proportion to minimize the impact of those risks (Kong et al, 2018).…”

“…Likewise auditors turn to overlook potential red flags when overly relied on formal controls. Experts recommend automated control environment with continuous audit program to adequately handle the increasing demand for rapid fraud detection and risk assessment [20]. However, new findings show that, despite the use of advanced internal audit techniques, organizations are still unable to achieve full compliance due to time, resource, and budget constraints [24].…”

Leadership support, innovative work behavior, employee work engagement, and corporate reputation: Examining the effect of female in not government organizations

“…The perception of the company's reputation (Rep) by female workers in NGOs is the third factor in this study. NGOs are dedicated to social and environmental performance, as we have already stated Harasheh and Provasi (2022). Businesses that follow the socalled B System are accountable to the law and transparent to the public (Honeyman & Jana, 2019).…”

Does it Make You Better Off? Initial Public Offerings (IPOs) and Corporate Sustainability Performance: Empirical Evidence

“…Publicly traded firms in Europe must publish sustainability-related information according to the EU directive on Non-Financial reporting (2014/95/EU) 1 that entered into force in 2017, establishing a new mandatory compliance regime to disclose non-financial information. Therefore, it is in the interest of the firm going public to improve the quality of information disclosed to the stakeholders as part of the new compliance regime and as a factor of attractiveness for external users (Al-Shaer & Zaman, 2018; Harasheh & Provasi, 2022).…”

“…Given that assurance of non-financial information is still pioneering and there is no standardization at the international level, different rating agencies might generate divergent sustainability ratings for the same company resulting in a certain degree of asymmetric information. Such asymmetries affect the flow of information and might impact the investor’s rational decision-making for stock selection (Harasheh & Provasi, 2022; Petelczyc, 2022; Sahoo & Kumar, 2022).…”