Influence of Internal Control on the Development of
the e-commerce enterprise
1.
Table of Content
Introduction: ....................................................................................................................... 3
2.
Literature review: ............................................................................................................... 3
3.
Research design: ................................................................................................................. 6
3.1.
Methodology: .............................................................................................................. 6
3.2.
Required data and data source:.................................................................................... 7
3.3.
Sampling: .................................................................................................................... 7
3.4.
Research approach: ..................................................................................................... 8
3.5.
Analytical technique:................................................................................................... 8
4.
Summary:............................................................................................................................ 9
5.
References: ....................................................................................................................... 11
1. Introduction:
In recent years, a series of accounting frauds have emerged in the world, from the early
American Enron case (Enron, 1997~2001) to Bristol-Myers Squibb (BMS, 2000~2002); these
frauds have repeatedly impacted People's trust in the company. The company's financial
statements make investors skeptical about whether the financial report can effectively disclose
the company's operations and financial status. This also makes us pay more and more attention
to the company's internal control and supervision. Internal control is a crucial point of impact
of the Foreign Corrupt Practices Act (FCPA) of 1977 and the Sarbanes-Oxley Act of 2002,
which require companies to certify their financial statements publicly. Whether there is a flaw
or whether the company's malpractices are indeed revealed
However, with technological development way of doing business shifted from a physical form
to a virtual form which is known as an e-commerce business. It is growing at a very fast pace
and even small organizations moving from physical business form to virtual business form.
The increasing importance of internal control around the globe to reduce the probability of
fraud motivated to research the influence of internal control on the development of e-commerce
businesses. Various strategy carried out in the field of internal control but these activities
analyze the impact of internal control on financial reporting or on the factors that impact the
effectiveness and efficiency of internal control. Neither of the studies directly focuses on how
internal control influences the development of e-commerce business.
In order to find out the solutions, to how internal control influences the development of ecommerce business answers to the following research questions have to be obtained:
1. How does internal control environment effectiveness impact the company personnel?
2. How does risk assessment work help in the development of a business organization?
3. How are control activities carried out in the e-commerce business?
4. How monitoring activities are embedded in every aspect of e-commerce business.
2. Literature review:
Internal control plays a crucial role in business strategy formation and paves the way for the
future of the organization. Therefore, various research is done by researchers on various aspects
of internal control and its impact on the organization. Goode et al., (2015) study the impact of
business strategy on internal control through the archival study method and found that business
strategy has a significant impact on the internal control system. Prospector strategy firms
disclose more weakness while defender firms disclose less material weakness. The influence
of internal control significantly depends on the vision of the company. A prospective company
means the first mover company in the market discloses more weakness in internal control while
the passive company or defender company discloses less weakness.
Similarly, Doyle (2006) study the determinates of internal control weakness over financial
reporting by analyzing 779 firms' material weaknesses and found that size, age, financial
stability, growth, and business structure all play a very crucial role. Firms that are younger,
financially weak, more complex, and rapidly growing face more internal weakness and vice
versa. Altamura (2010) study how internal control impact financial reporting by examining
Federal Depository Insurance Corporation Improvement Act (FDICIA) internal control
provisions on insurance firm and found that it improves the quality of financial reporting in the
banking industry.
Internal control is equally important in the e-commerce business. Electronic trade
association defines e-commerce business as a business carried out electronically through the
internet. Muda et al (2019) state in their study that in an e-commerce enterprise internal control
is grouped into two sections, general control and system specific. General control relates to
data centers while system-specific relates to sales-purchase orders, payroll, merchant debt, and
other specific functions. Managing the reliability and security of data centers in e-commerce is
the biggest challenge to maintaining the reliability and integrity of information. For this big
data are used by the entity to assess risk on a real-time basis. Chen et al (2015) study the fraud
risk management system based on big data at Alibaba and found that its RAIN score engine
level help in quantifying risk level from different users. Risk assessment help in identifying the
area from where risk can arise and help in mitigating risk through the formulation of the internal
control strategy. Salameh (2019) states in his study that risks must be identified to measure
their impact on financial reporting to establish a response for the same. It is important to
formulate and implement internal control to identify the risk for its mitigation.
In the e-commerce business, all the transactions are carried out with the help of the internet
irrespective of the country’s border. Alrawi (2019) states in their study that in an e-commerce
environment, it is necessary to embed preventive and detective control at the transaction
processing level. In other words, it can be said that internal control should be embedded from
a very low level to prevent the materialization of threats. This is very important as no physical
document or evidence is available to ensure the reliability and credibility of data.
Cross-border e-commerce enables the company to sell its product outside the home country
without having a legal entity in the foreign country. It increased the demand for internal control
to another level. Giuffrida (2020) states in their study that cross-border shipping of products
requires strict internal control of product quality to reduce the probability of fines for not
meeting required standards. In other words, it can be said that internal control is not only
required for managing the reliability and credibility of voluminous data but also required to
maintain the quality of the product.
Seeking the increasing importance of internal control and financial frauds, the Committee of
sponsorship organization of the trade way Commission (COSO) issued an integrated internal
control framework in 1992 by dividing internal control into five components of the control
environment, risk assessment, information, and communication, monitoring activities, and
existing control system. According to the COSO framework, everyone in the organization is
responsible to some extent for internal control top managers are responsible for the formulation
of strategy, and audit committees for assessing and providing a recommendation for internal
control. Fadzil et al (2005) state in their study that internal audit work as a monitoring tool and
helps the board in achieving the desired internal control objective.
Prior research carried out in the field of internal control is generally focused on the impact of
the internal control system, and internal control regulation on the financial reporting system
but does not take into account its impact on qualitative aspects of the company like how it
impacts the company personnel. Additionally, it focused on how the company’s vision impacts
the internal control and other factors that impact the internal control environment's
effectiveness and efficiency. Furthermore, researchers are more confined towards the security
of voluminous data and quality of the product that is shipped to a foreign country but do not
pay attention to risk assessment and internal control in other areas like risk arises because of
human resources, or because of error in a computerized system that may impact the whole
further processing of data and reliability, credibility, integrity and report generated based on
this transaction. This research is aimed to answer a question like the impact of the internal
control environment on company personnel, how risk assessment help in the development
business, how control activities are carried out, and how monitoring activities are embedded in
every aspect of e-commerce.
3. Research design:
3.1.Methodology:
Research methodology is the systematic method used to identify the answer to the research
problem. There are three research methodologies – qualitative, quantitative, and mixed. The
qualitative methodology of research is used to evaluate experiences, people's beliefs, attitudes,
and behaviour while quantitative research methodology is used to collect data to evaluate the
relationship, trends, and forecasting. A Mixed research methodology used both quantitative
and qualitative methodology techniques simultaneously.
In this case, qualitative research methodology is used. to evaluate because here the influence
of internal control on the development of e-commerce business has to evaluate, and quantifying
the influence in numerical terms is not possible. Furthermore, Nassaji (2020a) states in his
study that qualitative research is understanding and exploration rather than explaining and
manipulating data. It is an interpretative and contextualized study paying emphasis on the
process rather than the product. In other words, it is a kind of inquiry that deals with nonnumerical data. Nassaji (2020b) stated that qualitative research is robust, thoroughly
documented, well-informed research methodology. Qualitative methodology is also systematic
methodology like Quantitative methodology as it involves careful identification of problem,
collection, analysis, explanation, and evaluation of data. Thus while doing research technology
credibility, conformability, dependability, and transferability should ensure.
Additionally. Royadi et al (2020) state in their study that qualitative research is interpretive
research that is used to interpret the real world more effectively. In other words, qualitative
research is the scientific method that is used to understand the human problem in the social
context. Moreover, it is the phenomenon to understand belief, behavior perception,
motivations, and so on.
However, qualitative research more commonly used method in the field of research has several
limitations and criticism. Choy (2014) listed the limitation of qualitative research methodology
as time-consuming, objectively verifiable research, and skillful requirements of interviewers.
This research method requires a huge time for data collection, which is a time-consuming
process and requires specialized skills for the interview to collect data for research purposes.
Although qualitative research is a more time-consuming process when data is collected through
primary data collection methods using interviews, questionnaires, and survey while time
consumption is less if data collection for qualitative research is done through secondary
sources.
Although Qualitative research has several limitations. It is frequently used in the field of
academic research to identify the solution to research questions as there is no other method to
carry out qualitative research and therefore it is seamlessly used for carrying out qualitative
research.
3.2.Required data and data source:
As stated above qualitative research methodologies are used for assessing the influence of
internal control on the development of e-commerce business. Data are collected using
secondary sources. Secondary sources are those sources in which information previously
collected by some other researcher or government agency is used for carrying out research.
Annual reports of targeted companies Amazon, Alibaba, and eBay are used as secondary
resources to collect information from like financial statements- balance sheets, income
statements, and cash flow statements to evaluate the improvement in the financial picture of a
company because of continuous improvement in internal control. The intended timeline for
quantitative analysis is of 10 years from the year 2010- 2020.
3.3.Sampling:
Sampling refers to selecting units from the whole population for research to find the solution
to the research problem. Sampling is broadly classified into probability sampling and nonprobability sampling. In probability-based sampling, scientific methods are used for sample
collection while in non-probability-based techniques no specific scientific methods are used
for sample collection.
In this case, non-probability-based sample techniques like purposive or judgemental techniques
are used for selecting the company for evaluating the influence of internal control on ecommerce business development. Campbell et al (2020) state in their study that purposive
sampling is used by researchers when he is of opinion that a specific class of participants in the
population has different and important views about the research question. Similarly, Andrade
(2021) states in his study that purposive sampling is used when characteristics of purpose are
defined for the study. In simple words, it can state that purposive or judgemental sampling
should be used when from the whole population some specific unit can be easily selected based
on the requirements of the research topic. However, if all units possess the same capability to
fulfill the demand of research purposive sampling cannot be easily used.
In this case Influence of internal control is to study e-commerce companies only, therefore
purposely top e-commerce companies Amazon, Alibaba, and eBay are selected for the study.
As per Statista's report (2022, October 10) on large e-commerce companies in the world based
on market value Amazon and Alibaba ranked first and second respectively while eBay has an
eighth position in the world.
However, purposive or judgemental sampling is criticized to be influenced by researcher bias
and it is not as objective as random sampling. As stated by Thomas (2022) in his study that
purposive sampling is highly subjected to investigator bias, and purposeful sampling affects
data surveys and is ineffective if performed on an enormous population. Nevertheless,
purposive sampling is unarguably used when researchers believe that specific units of the
whole population is a better representative of the whole population and provide all required
data for required research.
3.4.Research approach:
The research approach is of three types deductive, inductive, and abductive. The deductive
research approach is used to explore existing theories to test whether that theory is valid in
specific circumstances or not while the inductive approach is used to formulate a new theory.
The abductive approach is the combination of both inductive and deductive approaches. In this
case, the deductive research approach is used in this study because this research is to identify
the relationship between two variables. Thus, in this case, it is the study of the impact of internal
control on e-commerce business development. Furthermore, Ganesha and S. (2022) state that
the deductive approach is used to verify existing theories about the relationship between the
variable of research questions. In other words, it can be said that the deductive research
approach is suitable when literature on the research topic is available in abundance and research
has to derive hypotheses from theory and subsequently has to test using empirical study.
However, the deductive approach is criticized for lack of methodological rigor by Casula et al
(2020) in their study. Although the deductive approach is unarguably used when literature
related to the research topic is available in abundance.
3.5.Analytical technique:
Analytical technique refers to techniques and methods used to analyze the data collected for
carrying out research. In this case, case study research is carried out using thematic analysis.
Case study-based research is used to analyze the specific contemporary phenomenon in the
real-life context using various sources of evidence. As stated above qualitative methodology is
used to carry out our research, and thematic analysis techniques are used for analyzing collected
qualitative data. Furthermore, Rashid et al (2019) state in their study that a case study is a
frequently used qualitative research strategy within some specific context using various data
sources, and it explores several aspects of phenomena. Similarly, Schoch (2020) stated in his
study that a case study is an intensive and detailed analysis of any situation, event, or
organization in a specific time frame and space. In other words, a case study is a detailed
analysis of any specific phenomenon through the analysis of collected data related to a specific
time frame.
Although a case study is the most commonly used research strategy by many researchers. As
stated by Lawrence (2019) that no scientific generalization can be made using a single case. It
is criticized for not being well structured and lacking a defined protocol. However, the criticism
of the case study strategy does not impact the frequent use of this research strategy for the
inferring result. This strategy can be used unarguably in qualitative research methodology if
data collection is done properly and there is sufficient information.
Thematic analysis is a frequently used qualitative research technique. Kiger and Varpio (2020)
state in their study that thematic analysis is a method used for analyzing qualitative data which
includes searching across the set of data to analyze and it is the best method for getting an
understanding of the specific set of experiences, behaviors, and thoughts. Furthermore,
Berbekova (2021) stated that thematic analysis is the qualitative method for assessing
underlying themes by organizing and describing the available data. In simpler words thematic
analysis intensive and exploratory study of the collected data set to infer the solution to the
research question.
However, even after frequent use, thematic analysis it is criticized by various researchers. As
stated by Thompson (2022) thematic analysis lacks the structures and rigor necessary for
reliable and credible academic research. Similarly, Grieve et al (2021) state that in thematic
analysis researchers fail to report an depth process of analysis. Although this criticism has not
to shadow down the importance of thematic analysis and it can be used unarguably to assess
the theme related to human behavior, attitude, and so forth which cannot be quantified.
4. Summary:
This research is focused on analysing the influence of internal control on the development of
e-commerce enterprises. As research is themed on influence it requires qualitative research,
therefore qualitative research methodology used to answer the research question impact of the
internal control environment on company personnel, how risk assessment help in the
development business, how control activities are carried out, and how monitoring activities are
embedded in every aspect of e-commerce. The secondary sources annual report are used for
collecting data of targeted company Amazon, Alibaba and eBay. These companies for research
are selected using purposive sampling technique as they are largest e-commerce company.
Deductive research approach are used to identify answer to research question as already huge
literature are available to research topics and it required only deductive study of literature in
desired research framework. Moreover case study strategy with thematic analysis techniques
are applied as it requires qualitative research of influence of internal control on development
of e-commerce business.
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