Quantitative and qualitative investments in internal control personnel and firm operational efficiency: Evidence from Korea

Although internal control systems in firms aim to provide reasonable assurance regarding objectives related to operations, reporting, and compliance, research focusing on operational efficiency is limited. This study investigates the impact of both quantitative and qualitative investments in internal control personnel on a firm’s operational efficiency. Utilizing a fixed-effect regression model, the Heckman (1979) two-stage model, and a two-stage least squares procedure, this study analyzes 4,471 firm-year observations from Korean listed firms from 2018 to 2020. The findings indicate a positive association between investment in internal control personnel and operational efficiency. This relationship remains robust even under sensitivity tests and concerns of potential endogeneity, as confirmed by the Heckman and two-stage least squares models. Specifically, the Heckman model shows that the ratio of the number of employees (coef = 0.023, t-value = 5.20) and certified public accountants (coef = 0.256, t-value = 5.43) responsible for internal control is positively associated with operational efficiency. Average work experience (coef = 0.002, t-value = 1.84) of internal control personnel is also positively related to operational efficiency. This study provides empirical evidence for the significance of investing in internal control personnel to boost operational efficiency and suggests that firms should consider both quantitative and qualitative aspects of internal control