Supplier Internal Control Quality and the Duration of Customer-Supplier Relationships

Posted: 27 Mar 2016 Last revised: 24 Oct 2018

See all articles by Andrew M. Bauer

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance

Darren Henderson

Wilfrid Laurier University

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: July 1, 2017

Abstract

Internal controls influence information quality, thus affecting the ability of supply chain partners, who rely on collaborative systems of information sharing, to reliably contract. Using SOX-related internal control assessments as a proxy for internal control quality and U.S. GAAP-mandated major customer disclosures, we find that supplier internal control quality influences supply chain relationship duration. Specifically, our evidence demonstrates that: 1) poor internal control quality increases the likelihood of subsequent customer-supplier relationship termination; 2) timely control weakness remediation attenuates termination likelihood; and 3) weaknesses affecting customer contracting drive the effect of internal control quality on relationship termination. Our results control for supplier operational quality and performance, and are robust to propensity score matching techniques, reverse causality, and alternative proxies for relationship termination and internal control quality. Overall, our findings are consistent with customers viewing strong supplier controls as important, albeit overlooked, contracting elements with significant implications for supply chain relationships.

Keywords: internal control; supply chain; contracting; information quality

JEL Classification: M40; M41; G30; D23; D82

Suggested Citation

Bauer, Andrew M. and Henderson, Darren and Lynch, Dan, Supplier Internal Control Quality and the Duration of Customer-Supplier Relationships (July 1, 2017). The Accounting Review, Vol. 93, No. 3, 2018, pp. 59-82. Available at SSRN: https://ssrn.com/abstract=2754760 or http://dx.doi.org/10.2139/ssrn.2754760

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance ( email )

200 University Ave W
Waterloo, Ontario N2L 3G1
Canada

Darren Henderson

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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