Assessment of the Internal Control System in the Accommodation Firm and Its Relation to Performance

Assessment of the Internal Control System in the Accommodation Firm and Its Relation to Performance

Murat Erdoğan (Akdeniz University, Turkey)
DOI: 10.4018/978-1-5225-8494-0.ch012

Abstract

An effective internal control system will help achieve performance and profitability targets within the core objectives of the business, help to prevent the need for loss of resources, and ensure that financial reporting is realistic and reliable. The purpose of this chapter is to identify the components of the internal control system in the enterprise and to show whether these factors affect the firm performance. When the results of the study are evaluated in general, it has been determined that the elements of the internal control system of the companies have an effect on the firm performance. According to this, the control environment 1, the control environment 2, the risk evaluation, the control activities, the information and the communication, the monitoring variables are effective on the positive side and the control variables on the firm performance have positive effect on the firm performance of the operation bed capacity, the operation period, and the existence of the internal control unit.
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Introduction

The fraudulent financial reporting, accounting scandals and economic crises, which are effective on the global scale, have faced important negativities and the need for control and audit activities has gained increasing importance (Amudo & Inanga, 2009). These developments have led to the implementation of important internal control and internal control models in the UK, Canada and the European Union, mainly in the United States of America, on internal control. In addition, the growth and complexity of the organizational structures of enterprises today, developments in technology, the need for knowledge, increasing competition environment, institutional management requirements and so on have revealed the necessity of an internal control system within the framework of the control function, which is one of the basic functions of management.

Establishment of internal control system effectively and its practice will make important contribution to achievement of performance and profitability targets within the main objectives and goals of the firms, prevention of resource losses, establishment of reliable and realistic financial reporting structure, etc.

When it is evaluated from the perspective of accommodation operations, it is observed that such enterprises are located in a labor intensive sector, the number of personnel is high and the turnover rate is high, the intensity of monetary transaction, the existence of products with high unit price, it is extremely important to establish and operate an effective internal control system in such enterprises (Okutmuş &Uyar, 2014). This study has made the necessary evaluations about the internal control systems in the hospitality enterprises and revealed the relation between the elements included in the internal control system and the performance of the accommodation enterprises.

Control is any action specified by the management to increase the likelihood of achieving objectives or goals. In other words, controls are actions designed to keep institutions in compliance with standards or plans (Hermanson & Hermanson, 1994). The control function is one of the firm functions and it generally draws attention as a coordinated process as a whole to ensure the comparison of the activities that are performed and the activities that are planned to perform result (Olalı & Korzay, 1993). In other words, control can also be expressed as a set of movements that will ensure successful achievement of foreseen goals, plans, policies and standards in the firm.

The basic steps of an effective control process are shown in Figure 1. When assessed in general terms, the control stage begins with the determination of standards; it goes on with measurement of outcomes and comparison the reel outcomes with expected results and it finally ends up with the review of the process by making necessary corrections.

Figure 1.

An effective control process

Establishment and operation of an effective internal control system will enable displaying behaviors of workers suitable with the aim of the firm and measurement of the effectiveness of these behaviors, the ability to clearly define the job descriptions of the people responsible for financial and non-financial transactions, the determination of the possible errors, frauds and risks in a comprehensive manner. It will also enable precautions taken in time and correctly in this way. In addition, it will contribute to the corporate governance of the business under the principles of transparency, equality, accountability and responsibility (Atmaca, 2012).

Key Terms in this Chapter

COSO: The Committee of Sponsoring Organizations of the Treadway Commission, COSO, is dedicated to providing thought leadership through the development of comprehensive frameworks and guidance on internal control, enterprise risk management, and fraud deterrence designed to improve organizational performance and oversight and to reduce the extent of fraud in organizations.

INTOSAI: The 1992 INTOSAI guidelines for internal control standards were conceived as a living document reflecting the vision that standards should be promoted for the design, implementation, and evaluation of internal control. This vision involves a continuing effort to keep these guidelines up-to-date. The 17th INCOSAI recognized a strong need for updating the 1992 guidelines and agreed that the Committee on Sponsoring Organisations of the Treadway Commission’s (COSO) integrated framework for internal control should be relied upon. Subsequent outreach efforts resulted in additional recommendations that the guidelines address ethical values and provide more information on the general principles of control activities related to information processing. The revised guidelines take these recommendations into account and should facilitate the understanding of new concepts with respect to internal control.

Internal Control: Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Internal Control System: System of internal control is expected to provide an organization with reasonable assurance that those objectives relating to external reporting and compliance with laws and regulations will be achieved. Achieving those objectives, which are based largely on laws, rules, regulations, or standards established by legislators, regulators, and standard setters, depends on how activities within the organization’s control are performed. Generally, management and/or the board have greater discretion in setting internal reporting objectives that are not driven primarily by such external parties. However, the organization may choose to align its internal and external reporting objectives to allow internal reporting to better support the entity’s external reporting.

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