Internal Control Weaknesses and Corporate Environmental Performance: Evidence from Toxic Chemical Pollutants

53 Pages Posted: 14 Dec 2020 Last revised: 26 Oct 2021

See all articles by Xin Chang

Xin Chang

Nanyang Business School, Nanyang Technological University

Kangkang Fu

Hong Kong Baptist University

Yiwei Li

University of Essex, EBS

Xiu-Ye Zhang

The Australian National University-Research School of Accounting

Date Written: December 1, 2020

Abstract

We investigate the environmental implications of firms’ internal control over financial reporting using data on toxic chemical waste generated by US firms to measure corporate environmental performance (CEP). We find that CEP is significantly poorer among firms with internal control weaknesses. Further, we document that CEP in such firms significantly improves following the remediation of internal control weaknesses. Additional analysis shows that the adverse environmental impact of internal control weaknesses is more pronounced in firms with lower readability and comparability in financial reporting, weaker environmental regulatory oversight, or poorer external governance mechanisms. Firms with internal control weaknesses also have higher costs of environmental regulatory enforcement caused by their noncompliance with regulations. Overall, our findings highlight the importance of effective internal control as a key determinant of CEP and illustrate the environmental effects of accounting.

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

JEL Classification: M41, M48, Q53

Suggested Citation

Chang, Xin and Fu, Kangkang and Li, Yiwei and Zhang, Xiu-Ye, Internal Control Weaknesses and Corporate Environmental Performance: Evidence from Toxic Chemical Pollutants (December 1, 2020). Nanyang Business School Research Paper No. 20-26, 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 )

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

The Australian National University-Research School of Accounting

Canberra, ACT 2601
Australia

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