The Linear and Non-Linear Effects of Internal Control and Its Five Components on Corporate Innovation: Evidence from Chinese Firms Using the COSO Framework

Kam C. Chan, Yining Chen and Baohua Liu

European Accounting Review, 2021, vol. 30, issue 4, 733-765

Abstract: This study examines the impact of internal control and its five components on corporate innovation using the Committee of Sponsoring Organizations (COSO) framework with a sample of Chinese firms. The impact of the internal control system as a whole, as well as the impact of the five components of internal control individually (i.e. control environment, risk assessment, control activities, information & communication, and monitoring), are analyzed. Our results suggest that internal control, as an integrated system, has significant positive impact on firm innovation, as measured by patent applications. We document that the magnitude of impact on innovation varies across different subcategories (components) of internal control, with control environment, control activities, and information & communication components exhibiting stronger impacts on innovation than those of risk assessment and monitoring components. In addition, we find that a high level of control environment, control activities, and information & communication (risk assessment and monitoring) components have a stronger (weaker) impact on innovation compared to a low level.

Date: 2021
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DOI: 10.1080/09638180.2020.1776626

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