Trust and Financial Reporting Quality
Bentley University - Department of Accountancy
Douglas F. Prawitt
Brigham Young University
September 4, 2014
Journal of Accounting Research, Forthcoming
Using unique survey data from Great Place to Work® Institute, we investigate the association of intra-organizational trust (i.e., employees’ trust in management) with three aspects of financial reporting: accruals quality, misstatements, and internal control quality. We find that trust is associated with better accrual quality, lower likelihood of financial statement misstatements, and lower likelihood of internal control material weakness disclosures. However, these effects are not uniform across all companies. Consistent with trust improving financial reporting quality through improved information production and information sharing, we find that trust is significantly associated with financial reporting quality in relatively decentralized firms, but not in firms that are relatively centralized. Our results are robust to several analyses that attempt to control for potential alternative explanations.
Number of Pages in PDF File: 52
Keywords: Trust; Information Sharing; Accruals; Internal Control; Misstatements
JEL Classification: M41
Date posted: August 29, 2012 ; Last revised: September 5, 2014
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