The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements
The Accounting Review: July 2016, Vol. 91, No. 4, pp. 1167-1194
Posted: 12 Jul 2016
Date Written: August 27, 2015
This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices.
Keywords: employee treatment policy, ineffective internal control, financial restatement
JEL Classification: M41
Suggested Citation: Suggested Citation