Investigating the Impact of Disclosing Internal Control Weaknesses on Labor Investment Efficiency

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Accounting and Auditing, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

2 MSc. Student, Department of Accounting, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

3 Ph.D. Candidate, Department of Accounting, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

10.22059/acctgrev.2025.384758.1009040

Abstract

Objective
This study is to examine the relationship between the disclosure of internal control weaknesses and the efficiency of human resources investment in companies listed on the Tehran Stock Exchange. Since investment in human resources is recognized as one of the vital factors for the development and growth of business units, studying the factors affecting the efficiency of such investments is of great importance. Weaknesses in the internal control system can influence managerial decision-making and prevent optimal and efficient human resources investment. Therefore, this study aims to clarify how the disclosure of these weaknesses may impact the efficiency of human resources investment.
Methods
The data collection method for this study is archival. To test the research hypotheses and examine the relationships among various variables, a panel data model has been employed. The model proposed by Cao et al. (2024) has been used to measure inefficiency in human resource investment. After applying the relevant restrictions, the statistical sample consists of 123 companies listed on the Tehran Stock Exchange over the period from 2013 to 2022. The total number of firm-year observations is 1,230.
Results
The statistical analysis reveals a negative and significant relationship between the disclosure of internal control weaknesses and the efficiency of human resources investment. In other words, the more internal control weaknesses a company has, the lower the efficiency of its human resources investments. These findings indicate that internal control issues can lead to incorrect decision-making in resource allocation to human capital, thereby affecting the efficiency of such investments. Moreover, reducing internal control weaknesses can improve decision-making processes and resource allocation to human capital, ultimately leading to better efficiency in human resources investments.
Conclusion
According to the research findings, weaknesses in internal controls can lead to incorrect decision-making regarding resource allocation to human capital, thereby affecting the efficiency of such investments. In the long run, this issue may negatively impact the performance and productivity of business units. Therefore, it is recommended that companies precisely identify the existing weaknesses in their internal control systems and implement the necessary reforms to mitigate these shortcomings. The fewer the internal control weaknesses, the more optimal the companies' human capital investments tend to be. Improvements in internal control systems can enhance the effectiveness and efficiency of these investments. This measure not only contributes to the improvement of companies' financial performance but also fosters a transparent and trustworthy environment for investors and other stakeholders. Ultimately, strengthening internal controls can prevent financial issues and increase public trust in companies' performance.

Keywords

Main Subjects

References

 
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Accounting and Auditing Review
Volume 32, Issue 3
2025
Pages 486-507

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