1. Introduction

Internal control is a central component of corporate governance because it supports reliable financial reporting, operational efficiency, asset protection, and compliance with laws and regulations. However, formal procedures are effective only when the organizational environment supports their implementation. Corporate culture shapes acceptable behavior, supervision, accountability, and compliance with established procedures. It may complement formal controls but can weaken them when trust and shared norms replace documentation, segregation of duties, and independent review.

This study examines the relationship between corporate culture and reported internal control weakness among firms listed on the Tehran Stock Exchange and Iran Fara Bourse. Corporate culture is analyzed through the Competing Values Framework, which distinguishes collaboration, control, competition, and creation cultures. The study addresses a gap in Iranian literature, where this relationship has mainly been examined through surveys. Combining textual analysis of board reports with auditor evidence provides an archival approach to cultural orientations and internal control outcomes.

2. Literature Review

Collaboration culture emphasizes trust, participation, teamwork, and internal cohesion. Excessive reliance on informal coordination may reduce attention to formal controls; therefore, the first hypothesis predicts a positive relationship between collaboration culture and internal control weakness. Control culture emphasizes stability, formal rules, documentation, and clear authority, leading to a predicted negative relationship. Competition culture focuses on performance targets, profitability, growth, and outperforming rivals. Such pressure may encourage employees to override controls; hence, a positive relationship is predicted. Creation culture emphasizes innovation, flexibility, decentralization, and risk-taking. When organizational change advances faster than control-system redesign, control procedures may become inadequate. Accordingly, a positive relationship between creation culture and internal control weakness is predicted.

3. Methodology

The study uses a quantitative, archival, and panel-data design. After applying the screening criteria, the final sample consists of 129 non-financial firms observed over Iranian fiscal years 1397–1402, approximately corresponding to 2018/19–2023/24, producing 774 firm-year observations.

Corporate culture is measured using annual board of directors’ activity reports. The reports were converted into searchable text through optical character recognition and preprocessed by standardizing Persian and Arabic characters, removing numbers and punctuation, correcting irregular spaces, and tokenizing the text. A localized dictionary was developed for each cultural dimension using prior international and Iranian studies and reviewed for consistency with Persian corporate reporting. For each firm-year, exact occurrences of words related to each dimension were counted and divided by total report words. The resulting ratios measure the intensity of collaboration, control, competition, and creation culture represented in corporate narratives. Thus, they capture culture disclosed in official reports rather than every informal aspect of actual organizational culture.

Internal control weakness is a binary variable derived from independent auditor and legal inspector reports. An observation is coded one when the report contains evidence attributable to deficiencies in the design or implementation of control procedures, and zero otherwise. Relevant evidence includes inadequate collection of receivables, missing supporting documentation, deficiencies in estimating provisions and costs, and weaknesses in recording, controlling, or reconciling accounts. Legal disputes, tax uncertainties, and events outside management’s control were excluded unless they reflected a specific control deficiency.

The empirical model includes the four cultural dimensions and control variables related to management changes, auditor characteristics, firm age, growth, industry concentration, profitability, size, leverage, operating volatility, cash flows, assets, book-to-market ratio, and loss history. Year and industry effects are included. Because diagnostic tests indicated heteroskedasticity and serial correlation, the final model was estimated using generalized least squares.

4. Results and Discussion

The descriptive results show that 36 percent of the observations contain at least one reported internal control weakness. Competition culture has the highest average textual score, followed by collaboration, creation, and control culture. Collaboration culture also displays greater dispersion than the other dimensions, indicating substantial differences in firms’ emphasis on participation, trust, relationships, and teamwork.

The regression results show that collaboration culture is positively and significantly associated with reported internal control weakness. In the model controlling for year and industry effects, its coefficient is 1.998, with a t-statistic of 2.698. The relationship remains positive and significant when year and industry effects are omitted. These results support the first hypothesis and indicate that greater narrative emphasis on collaboration, trust, and internal relationships is accompanied by a higher likelihood of auditor-reported control deficiencies.

A plausible explanation is that when interpersonal trust and informal relationships become dominant coordination mechanisms, firms may pay less attention to formal documentation, segregation of duties, independent verification, and systematic enforcement of procedures. Although collaborative values can improve commitment and information sharing, they may also reduce the independence and professional skepticism needed to identify, report, and correct control deficiencies.

The other cultural dimensions do not exhibit robust relationships with internal control weakness. Competition culture is insignificant in both specifications. Control culture is insignificant in the preferred model and becomes significant only when year and industry effects are excluded, indicating sensitivity to model specification. Creation culture is also insignificant in the preferred model, while its coefficient changes direction across specifications. Consequently, the second, third, and fourth hypotheses are not supported. Their consequences may instead depend on governance quality, managerial incentives, audit committee effectiveness, organizational complexity, and substantive implementation of formal procedures.

5. Conclusion

The findings show that corporate culture helps explain differences in reported internal control outcomes, but its effects vary across cultural dimensions. Collaboration culture is positively associated with internal control weakness, whereas control, competition, and creation cultures show no stable relationship. This result does not mean that collaboration is inherently harmful. Rather, it indicates that trust, participation, teamwork, and informal coordination cannot replace formal accountability, documentation, segregation of duties, and independent monitoring.

The findings have implications for boards, audit committees, internal auditors, and external auditors. Firms with strong collaborative environments should ensure that interpersonal trust is supported by documented procedures, appropriate segregation of duties, and effective independent review. Audit committees should prevent close relationships from discouraging employees from reporting deficiencies or challenging managerial decisions. External auditors may also consider textual indicators of culture as preliminary risk signals when planning control assessments.

The study contributes by integrating the Competing Values Framework, textual measurement of corporate culture, and auditor-reported internal control evidence in an emerging-market setting. It also provides an archival alternative to questionnaire-based research. Nevertheless, the findings indicate association rather than causality. Dictionary-based analysis cannot fully capture context, negation, or implicit meaning; board reports may portray a desired rather than actual culture; and the dependent variable reflects reported evidence rather than a comprehensive evaluation of the internal control system. Future studies may use contextual language models, alternative disclosures, survey validation, and governance or ownership moderators to clarify the mechanisms underlying these relationships.