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The impact of internal control requirements on profitability of Saudi shareholding companies

Ali A. Al-Thuneibat (Accounting Department, Faculty Economics and Administration, King Abdulaziz University, Jeddah, Saudi Arabia)
Awad S. Al-Rehaily (Accounting Department, Faculty Economics and Administration, King Abdulaziz University, Jeddah, Saudi Arabia)
Yousef A. Basodan (Accounting Department, Faculty Economics and Administration, King Abdulaziz University, Jeddah, Saudi Arabia)

International Journal of Commerce and Management

ISSN: 1056-9219

Article publication date: 1 June 2015

3253

Abstract

Purpose

This paper aims to investigate the compliance of Saudi shareholding companies with the requirements of internal control as set by the Saudi standard on internal control and its impact on the profitability of these companies.

Design/methodology/approach

A questionnaire was used to collect data about the compliance with internal control requirements, and four measures of profitability including earnings per share (EPS), return on assets (ROA), return on equity (ROE) and profit margin (PM) for profitability were calculated using data from the financial statements of these companies. Then, Multiple Regression and t-test were used to analyze the data and test the hypotheses.

Findings

The results of the study revealed that the degree of compliance with all components of internal control is very high. It also appears from the analysis that the effect of internal control and its components on ROA and ROE is significant and positive, while the effect on EPS and PM is positive but statistically insignificant.

Practical implications

Corporate managements should review the effectiveness of the implementation of internal control requirements, especially those related to control environment, information and communication and monitoring.

Social implications

The findings of the study shed light on the relevance of internal control systems of the Saudi shareholding companies in improving the financial performance of the these companies, which is expected to help in safeguarding the interests of all interest groups and improve the society’s well-being.

Originality/value

The paper provides new evidence about the relationship between internal control and profitability in the Saudi Arabian environment. The findings of the study add good contribution to the literature because they direct our attention to the expected effect of the environment on the relationship between internal control and performance. The results may suggest that there is a need to expand this study using other methodologies to delve into the depths and understand this phenomenon within its context.

Keywords

Citation

Al-Thuneibat, A.A., Al-Rehaily, A.S. and Basodan, Y.A. (2015), "The impact of internal control requirements on profitability of Saudi shareholding companies", International Journal of Commerce and Management, Vol. 25 No. 2, pp. 196-217. https://doi.org/10.1108/IJCOMA-04-2013-0033

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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