Internal Controls and Conditional Conservatism

By Beng Wee Goh, Dan Li. 2011

203 citations recorded by the source corpus.

ABSTRACT: This study examines the relation between internal controls and conditional conservatism (“conservatism”), also referred to as timely loss recognition. Using a sample of firms that disclose material weaknesses (MWs) in internal controls under the Sarbanes-Oxley Act (SOX), we find a positive relation between internal control quality and conservatism. Specifically, firms with MWs exhibit lower conservatism than firms without such weaknesses. Further, firms that disclose MWs and subsequently remediate these weaknesses exhibit greater conservatism than firms that continue to have MWs. Overall, these results are consistent with strong internal controls acting as a mechanism that facilitates conservatism. Our study contributes to the literature on the reporting effects of strong versus weak internal controls.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/4578719cd1b9ec73481fcc1f7a4cb0966d2a2040

How researchers see this paper

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In Accounting

1. Simon S. M. Ho
2. F. Zhang
3. Kinsun Tam
4. A. Li

Citations in the corpus

• Political Uncertainty and Accounting Conservatism (2013, unknown): “17 We construct firm-year estimates of accounting conservatism, C-Score, developed by Khan and Watts (2009), which allows us to capture both cross-sectional and time-series variation of asymmetric earnings timeliness.”
• CEO Gender, Ethical Leadership, and Accounting Conservatism (2015, background): “Our approach and our choices of control variables are consistent with the extensive body of prior research that has adopted these models (e.g., Chen et al. 2010; Chung and Wynn 2008; Goh and Li 2011; Ramalingegowda and Yu 2012).”