The Influence of Internal Controls on Public Financial Reporting Quality (PFRQ) in Sri Lanka; An Empirical Study

Abstract

Public financial reporting is accountable to maintain public trust by protecting the accountability, openness, and transparency of public money which leads to the good governance of the country. There were many criticisms over financial reporting quality by various stakeholders of entities across the countries. There is a growing concern over the quality of PFR which determines the level of performing expectations of financial reporting. Assurance of PFR in Sri Lanka has deteriorated and been questioned by legislative authorities and interested parties because of the quality concerns. Considering the scholarly studies in various countries, the study was carried out in Sri Lanka to investigate the influence of Internal Controls (ICs) over the Public Financial Reporting Quality (PFRQ) with an objective to measure and conclude the determinants. To conclude the impact, the study investigates the influence of five basic dimensions of ICs introduced in previous literature, namely: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring. Considering the facts of the context of Sri Lanka, the research has investigated the influence of IC on public financial reporting quality in the central government ministries and departments environment in Sri Lanka. The primary data was collected by a questionnaire survey conducted with accountants who are being employed in the central government ministries and departments in Sri Lanka. Data have collected by a structured questionnaire and verified by Cronbach’s alpha test for reliability. A multiple linear regression model was developed and tested to determine the statistical influence of variables of IC over the dependent PFRQ. The findings investigate and conclude the positively significant influence of IC on the PFRQ in the central government ministries and departments in Sri Lanka. Further, it was admitted the significant direct influence of IC attributes of Control Environment, Information and Communication and Monitoring to determine the PFRQ. Based on the facts, the study recommends the public sector in Sri Lanka to ensure the effectiveness of ICs in government institutions to improve and maintain the trust level of PFRQ.

Keywords: Financial Reporting, Public Financial Reporting Quality, Internal Controls