Work

Reputable Inside Directors and Internal Control Effectiveness

Year: 2022

Type: article

Abstract: Internal control effectiveness is an important indicator of financial reporting quality. This study investigates whether reputable inside directors impact a firm’s internal control over financial reporting. Using a large sample of Standard & Poor’s 1500 firms from 2004 to 2012, we find that firms with reputable inside directors are less likely to have reported and likely internal control weaknesses and the association is more pronounced when (1) firms have higher needs for monitoring; (2) firms have higher costs of misreporting; (3) the reputable inside directors have higher reputational concerns; and (4) the reputable inside directors have no connections with the chief executive officers. We also find that the likelihood of remediating internal control weaknesses is significantly increased when new reputable inside directors join a firm. These findings enrich prior empirical studies examining the determinants of internal control weaknesses and have corporate governance policy implications for regulators by supporting the desirable role of inside directors.

Source: European Accounting Review

DOI: 10.1080/09638180.2022.2156573

Authors: Zhijun Lin, Byron Y. Song, Zhimin Tian

Institutions: Macau University of Science and Technology, Hong Kong Baptist University, Beijing Normal-Hong Kong Baptist University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: green

Funder: Research Grants Council, University Grants Committee