Internal Control Weaknesses and the Demand for Financial Skills: Evidence from U.S. Job Postings

Abstract

Ineffective internal controls over financial reporting often relates to a lack of qualified personnel with sufficient accounting and technical expertise. In this study, we examine whether firms respond to internal control failures by increasing their demand for specific accounting and finance skills. Using unique data containing an extensive collection of job postings, we document significant increases in firms’ demand for employees with financial skills following the disclosure of an internal control weakness. This demand effect is more pronounced among jobs requiring accounting skills or accounting software knowledge, but also extends to non-accounting personnel that interface with accounting functions, suggesting an important role for all firm personnel in remediating internal control failures. We also find that increased financial skill demand is associated with a higher likelihood of internal control remediation, especially for firms with restatements. We also provide additional evidence consistent with increased financial skill demand relating to the disclosure of a material weaknesses rather than a proactive firm response to internal control issues. Overall, our findings shed new light on how firms internally respond to ineffective internal controls by increasing their demand for financial skills in their workforce.

Keywords: Internal Controls, Material Weakness, SOX 404, Human Capital, Job Postings, Financial Skills Demand

JEL Classification: G30, J23, M41, M42