Regulatory fragmentation and internal control weaknesses
In: Journal of accounting and public policy, Volume 44, p. 107191
ISSN: 0278-4254
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In: Journal of accounting and public policy, Volume 44, p. 107191
ISSN: 0278-4254
In: Journal of Accounting and Finance, Volume 17(3), p. 121-136
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In: Journal of Accounting Literature (Forthcoming)
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In: Forthcoming in Advances in Accounting, doi 10.1016/j.adiac.2020.100473
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In: Corporate governance: an international review, Volume 32, Issue 3, p. 474-499
ISSN: 1467-8683
AbstractResearch Question/IssueThe 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/InsightsUsing 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 ImplicationsOur 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 ImplicationsOur results shed light on the important role of subordinate executives in monitoring CEOs' short‐term interests.
In: Journal of Corporate Accounting & Finance
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In: Corporate Governance: An International Review Forthcoming
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In: International Journal of Auditing, Forthcoming
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In: Review of Quantitative Finance and Accounting (Forthcoming)
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In: Xu, H, Dao, M, and Sun, H Accounting Firms' Employee Satisfaction and Audit Fees Accounting and Business Research 2022
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In: Mai Dao, Duong Nguyen, Hongkang Xu. Financial Restatements and the Demand for Trade Credit. Journal of Accounting, Auditing and Finance, Forthcoming
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In: Dao, M., Xu, H. and Sun, Hua., 2022. Corporate Site Visits and Financial Report Quality. Journal of Corporate Accounting and Finance.
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In: Journal of Corporate Accounting and Finance Forthcoming
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In: Gao, Li., Shi, Yuan., Xu, Hongkang., 2022. Pilot CEOs and Management Earnings Forecasts. Journal of Corporate Accounting & Finance. https://onlinelibrary.wiley.com/doi/10.1002/jcaf.22534
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In: Accounting Horizons Forthcoming
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