Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes
50 Pages Posted: 29 Dec 2006 Last revised: 5 Dec 2012
Date Written: November 1, 2008
This study examines the association between corporate governance and disclosures of material weaknesses (MW) in internal control over financial reporting. We study this association using MW reported under Sarbanes-Oxley Sections 302 and 404, deriving data on audit committee financial expertise from automated parsing of member qualifications from their biographies. We find that a lower likelihood of disclosing Section 404 MW is associated with relatively more audit committee members having accounting and supervisory experience, as well as board strength. Further, the nature of MW varies with the type of experience. However, these associations are not detectable using Section 302 reports. We also find that MW disclosure is associated with designating a financial expert without accounting experience, or designating multiple financial experts. We conclude that board and audit committee characteristics are associated with internal control quality. However, this association is only observable under the more stringent requirements of Section 404.
Keywords: Internal controls, corporate governance, audit committee, financial expertise
JEL Classification: G34, G38, M41, M43, M49
Suggested Citation: Suggested Citation