The Connection Between Internal Control System, Financial Distress, Risk, and Financial Performance: A Study on BIST Manufacturing Firms

The need for internal control systems has been highlighted by accounting scandals and financial reporting fraud, which started in the US and eventually expanded throughout the world. Internal control systems can reduce mistakes and fraud while increasing an organization's profitability if they are implemented properly. The objective of the study is to examine and analyze the connection between the internal control system, financial failure risk, and financial performance. The present study is designed to add to the literature by investigating the effects of financial distress on the performance of internal control systems. The study selected manufacturing companies listed on the Istanbul Stock Exchange for the period 2000–2020. Correlation analysis was used to test the study’s hypotheses and analyze the relationships, while the Altman Z-Score model was applied to assess the financial distress risks of the firms. As a result, it was observed that the relationship between the three concepts differed. There is no relationship between the effectiveness of the internal control system of companies and financial failure and financial performance.