How Does Internal Control Regulation Affect Financial Reporting?
45 Pages Posted: 15 Sep 2006 Last revised: 15 Sep 2009
Date Written: June 24, 2009
Internal control regulation effectiveness remains controversial given the recent financial crisis. To address this issue we examine the financial reporting effects of the Federal Depository Insurance Corporation Improvement Act (FDICIA) internal control provisions. Exemptions from these provisions for banks with assets under $500 million and for non-U.S. banks provides two unaffected control samples. Our difference-in- differences method suggests that FDICIA-mandated internal control requirements increased loan-loss provision validity, earnings persistence and cash-flow predictability, and reduced benchmark-beating and accounting conservatism for affected versus unaffected banks. More pronounced effects in interim versus fourth quarters suggests that greater auditor presence substitutes for internal control regulation.
Keywords: Internal Control, Earnings Quality, Banking
JEL Classification: G1, G21
Suggested Citation: Suggested Citation