Internal Control over Financial Reporting and Corporate Environmental Performance

45 Pages Posted: 14 Dec 2020

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Kangkang Fu

Hong Kong Baptist University

Yiwei Li

University of Essex, EBS

Xiu-Ye Zhang

Australian National University (ANU) - School of Accounting & Business Information Systems

Date Written: December 1, 2020

Abstract

We investigate the environmental implications of firms’ internal control over financial reporting. Our main result is that corporate environmental performance, measured using the amount of firms’ toxic production-related waste, is significantly poorer among firms with material weaknesses in internal control over financial reporting than firms without such weaknesses. Furthermore, we document a significant improvement in corporate environmental performance following the remediation of internal control deficiencies, substantiating a causal relation between internal control over financial report and corporate environmental performance. Additional analyses show that the adverse effect of internal control weakness is exacerbated for firms with greater earnings opacity or weaker external governance mechanisms. Overall, our findings provide insights into the determinants of corporate environmental performance, highlight the environmental and social benefits of effective internal control over financial reporting, and manifest the real and environmental impacts of accounting.

Keywords: Corporate Environmental Performance; Internal Control over Financial Reporting; Toxic Waste; Real Effects of Accounting

JEL Classification: M41, M48, Q53

Suggested Citation

Chang, Xin and Fu, Kangkang and Li, Yiwei and Zhang, Xiu-Ye, Internal Control over Financial Reporting and Corporate Environmental Performance (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3741197 or http://dx.doi.org/10.2139/ssrn.3741197

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-01B-40 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Kangkang Fu (Contact Author)

Hong Kong Baptist University ( email )

34 Renfrew Road
Wing Lung Bank Building for Business
Hong Kong
Hong Kong

Yiwei Li

University of Essex, EBS ( email )

University of Essex Wivenhoe Park
Essex business school
Colchester, CO4 3SQ
United Kingdom

Xiu-Ye Zhang

Australian National University (ANU) - School of Accounting & Business Information Systems ( email )

Canberra
Australia

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