COSO-Based Internal Control and Accounts Receivable Management

Internal control regulations in China follow the Committee of Sponsoring Organizations (COSO) framework, which promotes enterprise risk management and considers both financial reporting and operations. Using a COSO-based internal control index, we find that internal control plays an important role in accounts receivable management in China. Specifically, internal control quality (ICQ) is associated with greater receivables turnover, less receivable aging, and less receivable impairment, which indicates that ICQ mitigates risk related to receivables and improves receivable management. Our supplemental analysis reveals that additional cash flows from operations are generated when internal control alleviates problems related to receivables. Moreover, ICQ shortens the overall cash conversion cycle, despite faster payable turnover. Because the Sarbanes-Oxley Act Section 404 has a narrower scope and covers only internal control over financial reporting, our evidence regarding the effect of COSO-based internal control on receivable management fills a gap in the extant literature. Data Availability: Data are available from specific sources cited in the text. JEL Classification: M42.