Internal governance and internal control material weaknesses

IF 4.6 3区 管理学 Q1 BUSINESS Corporate Governance-An International Review Pub Date : 2023-07-12 DOI:10.1111/corg.12548
Mai Dao, Trung Pham, Hongkang Xu
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Abstract

Research Question/Issue

The objective of this study is to examine whether the effectiveness of internal governance is associated with internal control material weaknesses. We employ the concept of internal governance as the checks-and-balances mechanism that subordinate executives apply to the chief executive officer (CEO). We predict that with long horizons and long-term interests aligned with firms' long-term growth, subordinate executives may have the incentive to support a high-quality internal control system, which is an important factor contributing to firms' long-term success.

Research Findings/Insights

Using data on CEOs' and other highest paid executives' age and compensation to measure the effectiveness of internal governance, we empirically find consistent evidence that internal governance effectiveness is associated with higher internal control quality. In particular, we find that effective internal governance is related to a lower likelihood of firms reporting internal control material weaknesses, fewer material weaknesses in internal control (ICMWs), a lower chance of firms disclosing internal control weaknesses for multiple years, and a lower probability of firms reporting entity-level and/or account-level material weaknesses in internal control. We also show that among the two factors forming the internal governance measure, only subordinate executives' horizon is associated with the probability of firms disclosing ICMWs. Our further analysis reveals that the probability of reporting ICMWs is lower for growth firms with effective internal governance.

Theoretical/Academic Implications

Our findings contribute to the literature on internal governance and internal control quality. The impact of the checks-and-balances mechanism inherent in internal governance on firms' investment in the internal control system and thus the probability of disclosing ICMWs has not received sufficient attention from accounting researchers. While prior studies focus on individual members of the management team, our finding implies that the quality of the internal control system is a result of the joint effort of the whole management team. Unlike the extant literature that captures only certain aspects of reporting quality and information disclosures, our study emphasizes the role of the horizon dimension of internal governance in enhancing the reliability of financial reporting (measured as the quality of the internal control system).

Practitioner/Policy Implications

Our results shed light on the important role of subordinate executives in monitoring CEOs' short-term interests.

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内部治理和内部控制的重大弱点
研究问题 本研究的目的是探讨内部治理的有效性是否与内部控制重大缺陷有关。我们采用的内部治理概念是下属高管对首席执行官(CEO)的制衡机制。我们预测,由于下属高管的长远眼光和长期利益与公司的长期发展相一致,他们可能会有动力支持高质量的内部控制系统,而这正是促进公司长期成功的重要因素。 研究结果/启示 利用首席执行官和其他最高薪酬高管的年龄和薪酬数据来衡量内部治理的有效性,我们通过实证研究发现了内部治理有效性与内部控制质量较高相关的一致证据。特别是,我们发现有效的内部治理与公司报告内部控制重大缺陷的可能性较低、内部控制重大缺陷(ICMW)较少、公司披露多年内部控制缺陷的几率较低以及公司报告实体级和/或账户级内部控制重大缺陷的概率较低有关。我们还发现,在构成内部治理衡量标准的两个因素中,只有下属高管的视野与企业披露 ICMWs 的概率相关。我们的进一步分析表明,内部治理有效的成长型企业报告 ICMW 的概率较低。 理论/学术意义 我们的研究结果为有关内部治理和内部控制质量的文献做出了贡献。内部治理所固有的制衡机制对企业内部控制系统投资的影响,进而对披露 ICMWs 概率的影响,尚未引起会计研究人员的足够重视。以往的研究主要关注管理团队中的个别成员,而我们的发现则意味着内部控制系统的质量是整个管理团队共同努力的结果。与只关注报告质量和信息披露的某些方面的现有文献不同,我们的研究强调内部治理的视野维度在提高财务报告可靠性(以内部控制系统的质量来衡量)方面的作用。 实践者/政策含义 我们的研究结果揭示了下属高管在监督首席执行官短期利益方面的重要作用。
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来源期刊
CiteScore
7.00
自引率
11.30%
发文量
79
期刊介绍: The mission of Corporate Governance: An International Review is to publish cutting-edge international business research on the phenomena of comparative corporate governance throughout the global economy. Our ultimate goal is a rigorous and relevant global theory of corporate governance. We define corporate governance broadly as the exercise of power over corporate entities so as to increase the value provided to the organization"s various stakeholders, as well as making those stakeholders accountable for acting responsibly with regard to the protection, generation, and distribution of wealth invested in the firm. Because of this broad conceptualization, a wide variety of academic disciplines can contribute to our understanding.
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