The effect of product market competition on the quality of internal control with an emphasis on the social role of the board of directors

A quality internal control system within a company can provide the basis for the success of the company in the competitive conditions of the product market. This research was conducted with the aim of investigating the effect of product market competition on the quality of internal control, emphasizing the social role of the board of directors.

This research is applied in terms of purpose and correlational in terms of nature. In order to achieve the goal of the research, 155 companies were selected from among the companies admitted to the Tehran Stock Exchange between 2010 and 2017 by systematic elimination method and considered as the main sample. Logistic regression was also used to examine the relationships between variables.

The results of the research show that product market competition has an effect on the quality of internal control based on Hirfendahl-Hirschman index and adjusted Lerner index. Also, the social role of the board of directors has an effect on the quality of internal control based on the independence of the board, the size of the board and the duality of the CEO's duties.

Product market competition can reduce the profit of the company by affecting the behavior of shareholders and managers through the threat of liquidation and the effect of agency costs, and expose the company to more liquidity risk, and as a result, increase the probability of losses and bankruptcy. May this be the cause of this relationship in the present research. Also, since the company's board of directors is in charge of monitoring and controlling its systems, its characteristics have the ability to influence the company's internal controls. The responsibility of the board of directors is to provide independent supervision of the performance of the executive directors and to require the directors to be accountable to the shareholders.