The Effect of the Board of Directors and Audit Quality on Disclosure of Internal Control Practices: Evidence from European Companies

The purpose of this paper is to examine the effect of the board of directors, namely board size, board independence, and CEO duality, as well as audit quality on the disclosure of internal control information. The sample consists of 164 European companies listed in the STOXX Europe 600. Based on positive agency theory, the authors posit that board of directors and audit quality influence corporate internal control disclosure practice. The content analysis and the design of the evaluation criterion were used to calculate the disclosure index of internal control. Thus, multiple regression analysis is utilized to analyze the results of this paper. The average internal control information disclosure index was 0.285, indicating that most of the companies in our sample do not disclose enough information about the internal control. This low level of forward-looking information disclosure makes it very difficult for corporate stakeholders to determine the future performance of the company. Multivariate results indicate that internal control disclosure is positively and significantly associated with board independence, CEO duality, and audit quality. This study contributes to the literature on the various governance characteristics and disclosure by showing that the disclosure of internal control information in European countries is positively and significantly associated with board independence, separation of duties, and audit quality. Our study was based on a sample of European companies including countries regulating IC disclosure as well as unregulated settings. As noted by Bedard and Graham (2014), regulatory differences in countries can contribute insights on the costs and benefits of disclosure. Findings also have policy implications for investors, managers, and regulators.