Internal Control System in Japanese Companies

Abstract

The purpose of this paper is to explore the effect of internal control system in Japanese companies, given that most previous research on internal control has focused on US contexts. This study conducted interviews with three Japanese companies to investigate where the effects of the internal control system were apparent, if it did indeed function effectively, and in the case of its having no effects, where the problem behind this ineffectiveness could be located. The results of such analysis of particular cases have very low universality compared with those of quantitative studies. However, this analysis of specific issues has allowed for the identification of problems that ensue upon the introduction of internal control system. Of the three companies, two of them had remarkable effects from the introduction of an internal control system in the area of improvement of effectiveness and efficiency of operations. The companies that had such effects showed distinctive features such as vulnerabilities in their existing operation manuals, the need for visualizing their operations, and considerable variety in their kinds of operations. On the other hand, the companies in which effects were not apparent were distinguished by the fact that they cannot secure effectiveness or efficiency of operations merely through the improvement of manuals as there is little routine-type work. None of the companies enjoyed any extensive benefits when it came to detecting and preventing fraud. The reasons given were that the system demanded no more than formal checks, and that managerial skill was more important than the manual in preventing fraud because the kind of operations involved almost no routine work.