Exploration into Determinants of Internal Control Deficiencies (ICDs) for SMEs
Maastricht University School of Business & Economics Maastricht, September 20th, 2011
Student: Györfi, Norbert Adam ID: I6015219
Master of Science in International Business, Track Accounting Thesis Supervisor: Dr. Caren Schelleman Second Supervisor: Dr. Rogier Deumes
Exploration into Determinants of Internal Control Deficiencies (ICDs) for SMEs by Norbert Adam Györfi, Master Graduate, Accounting and Information System Department, Maastricht University, Maastricht 2011, The Netherlands
The thesis explores the field of internal control deficiencies in small and medium sized enterprises (SMEs) by examining whether common theoretical and practical determinants of internal control deficiencies (ICDs) are applicable to SMEs. This is achieved by a data collection of 225 companies from various databases to construct SME characteristic variables and determinants of ICDs that are tested in an empirical way. In addition, the thesis also tests potential compensator from practice on their effect on the determinants of ICDs and thus if they reduce internal control deficiencies in SMEs. It was found that certain determinants, e.g. accruals quality, discretionary accruals, leverage, etc. are applicable and valid determinants of internal control deficiencies in SMEs. It was also found that none of the suggested compensators are valid and applicable. Thus, SMEs display internal control deficiencies that can be determined with the determinants and are most visible over determinants that track intercompany movements. It is recommended that future studies should concentrate on additional determinants and compensators as well as a predictive model for ICDs. Auditing professionals are advised to be careful about basing their control risk assessment on perceived and tested compensators when planning a SME audit.
Keywords: SME, Internal Control Deficiencies, Auditing
“All truths are easy to understand once they are discovered; the point is to discover them.” (Galileo Galilei)
In the first place, I want to thank my supervisor, Dr. Caren Schelleman, for her patience, support and critical feedback on early drafts of this thesis. She helped me through her comments and notes to stay focused and clear minded on my topic, to erase complicated and confusing structures of my written ideas and provide me with guidance throughout the whole thesis process. Our few but intense consultations were inspiring and I tried to incorporate the results as complete as possible into the thesis. Without her help, support and constructive criticism, it would not have been possible to craft this thesis in this form.
Furthermore, I also want to thank my fellow colleagues and my manager at PricewaterhouseCoopers (PwC) with giving me unique insight into financial statement auditing and internal control auditing during my internship and providing me with access to their extensive library and practitioner’s literature. It contributed to the practical notion of this thesis.
I also want to thank the auditing company for providing me with the special sample from their records as it provided additional insights to my larger sample of collected companies.
Finally, I very much and especially thank my family and my friends, which gave me strong moral boosters, their general patience and support throughout this special time. Their belief in me always refreshed a tired brain and they supported me heavily during my step from university to work life.
Word Count: 18,725
Statement of Truthfulness
I confirm that this thesis is my own work and no part of it has been previously published elsewhere or submitted as part of any other module assessment. Any errors or omissions are the sole responsibility of the author.
Maastricht, 20th September 2011
Norbert Adam Györfi
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