Regulatory fragmentation and internal control weaknesses

Abstract

This study examines the relationship between regulatory fragmentation and internal control weaknesses in U.S. firms using a dataset sourced from the Federal Register. The findings reveal a significant negative association between regulatory fragmentation and the likelihood of internal control weaknesses. The study further finds that regulatory fragmentation reduces the number of internal control weaknesses. These results suggest that regulatory fragmentation plays a beneficial role in enhancing the effectiveness of internal control mechanisms. Alternative empirical specifications and identification strategies are employed to address endogeneity concerns, supporting the robustness of the main findings. Unlike existing literature emphasizing the adverse effect of regulatory fragmentation, this study highlights the benefits of coordinated regulatory fragmentation in mitigating internal control vulnerabilities and strengthening corporate governance. The findings provide valuable insights for policymakers and companies, emphasizing the need to consider regulatory fragmentation as a means to enhance internal control practices and promote stronger corporate governance.