Reputable Inside Directors and Internal Control Effectiveness

60 Pages Posted: 16 Dec 2014

See all articles by Zhijun Lin

Zhijun Lin

Hong Kong Baptist University

Byron Y. Song

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Zhimin Tian

United International College (UIC)

Date Written: December 15, 2014

Abstract

The study investigates whether non-CEO inside directors with reputation incentives affect the effectiveness of a firm’s internal control over financial reporting. Internal control effectiveness is an important indicator of financial reporting quality. Using a large sample of 7,352 firm-year observations from 2004 to 2012, we find that firms with RIDs are less likely to report internal control weaknesses (ICWs). We also find that RIDs have a more pervasive impact on account-level ICWs than company-level ICWs. Empirical results also demonstrate that the association between RIDs and ICWs is more pronounced for firms with lower audit quality, higher CEO entrenchment, and higher cost of misreporting. These findings add to the few empirical studies examining the determinants of ICWs and have corporate governance policy implications for regulators by supporting the desirable role of inside directors in terms of efficient contracting.

Keywords: internal control effectiveness; internal control weakness; inside directors; board

JEL Classification: M41; G34

Suggested Citation

Lin, Zhijun and Song, Byron Y. and Tian, Zhimin, Reputable Inside Directors and Internal Control Effectiveness (December 15, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2538459 or http://dx.doi.org/10.2139/ssrn.2538459

Zhijun Lin

Hong Kong Baptist University ( email )

Department of Accountancy & Law
School of Business
Kowloon Tong, Kowloon
Hong Kong

Byron Y. Song (Contact Author)

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Zhimin Tian

United International College (UIC) ( email )

Financial Mathematics Programme
BNU-HKBU UIC, 28 Jinfeng Road
Zhuhai, Guangdong 519085
China

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