Internal Control and Management Guidance

51 Pages Posted: 23 Sep 2008 Last revised: 16 Sep 2009

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Sarah E. McVay

University of Washington

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Date Written: September 10, 2009

Abstract

We examine the relation between internal control quality and the accuracy of management guidance. Consistent with managers in firms with ineffective internal controls relying on erroneous internal management reports when forming guidance, we document less accurate guidance among firms reporting ineffective internal controls. This relation extends to a change analysis, and the impact of ineffective internal controls on forecast accuracy is three times larger when the weakness relates to revenues or cost of goods sold — inputs particularly relevant to forecasting earnings. We conclude that internal control quality has an economically significant effect on internal management reports and thus decisions based on these figures.

Keywords: Management Guidance, Management Forecast Accuracy, Internal Control over Financial Reporting

JEL Classification: M41, M43, M45, G29, G34

Suggested Citation

Feng, Mei and Li, Chan and McVay, Sarah E., Internal Control and Management Guidance (September 10, 2009). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1267329

Mei Feng (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Sarah E. McVay

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

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