How Does Internal Control Regulation Affect Financial Reporting?

Posted: 13 Jul 2009

See all articles by Jennifer Lynne M. Altamuro

Jennifer Lynne M. Altamuro

Villanova University - Accountancy

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: July 13, 2009

Abstract

Internal control regulation effectiveness remains controversial given the recent financial crisis. To address this issue we examine the financial reporting effects of the Federal Depository Insurance Corporation Improvement Act (FDICIA) internal control provisions. Exemptions from these provisions for banks with assets under $500 million and for non-U.S. banks provides two unaffected control samples. Our difference-in-differences method suggests that FDICIA-mandated internal control requirements increased loan-loss provision validity, earnings persistence and cash-flow predictability, and reduced benchmark-beating and accounting conservatism for affected versus unaffected banks. More pronounced effects in interim versus fourth quarters suggests that greater auditor presence substitutes for internal control regulation.

Keywords: Internal Control, Earnings Quality, Banking

JEL Classification: G1, G21

Suggested Citation

Altamuro, Jennifer Lynne M. and Beatty, Anne L., How Does Internal Control Regulation Affect Financial Reporting? (July 13, 2009). Journal of Accounting & Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1433423

Jennifer Lynne M. Altamuro

Villanova University - Accountancy ( email )

United States

Anne L. Beatty (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

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