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

See all articles by Jun Guo

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden

Pinghsun Huang

National Cheng Kung University

Yan Zhang

State University of New York at Binghamton - School of Management

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: August 27, 2015

Abstract

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

Guo, Jun and Huang, Pinghsun and Zhang, Yan and Zhou, Nan, The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements (August 27, 2015). The Accounting Review: July 2016, Vol. 91, No. 4, pp. 1167-1194. Available at SSRN: https://ssrn.com/abstract=2807256

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )

Camden, NJ 08102
United States

Pinghsun Huang (Contact Author)

National Cheng Kung University ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886 6 275 7575 ext 53441 (Phone)
+886 6 274 4104 (Fax)

Yan Zhang

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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