Internal control effectiveness, textual risk disclosure, and their usefulness: U.S. evidence

Mohamed Elsayed and Tamer Elshandidy

Advances in accounting, 2021, vol. 53, issue C

Abstract: This paper investigates the impact of internal control effectiveness (ICE) on the level of textual risk disclosure (TRD; including aggregate risk disclosure and its tone of good news and bad news about risk). Our findings suggest that firms with an ineffective internal control system exhibit significantly lower levels of TRD than firms with effective internal controls. Besides, we show a significant change in TRD behavior provided by managers of firms with recurrent ineffective internal controls. Pursuant to agency theory, this behavior change is prompted to reduce the expected public uncertainty and agency problems. We also investigate the usefulness of ICE reporting and TRD to the market. Results suggest that firms reporting ineffective internal controls are likely to have higher investor-perceived risk than firms reporting effective internal controls. Furthermore, TRD improves firms' market liquidity, and such improvement is principally driven by good news rather than bad news about risk. Collectively, our results fill an apparent gap in the literature on the importance of ICE, as well as the usefulness of the external auditor's attestation on a firm's internal controls and management TRD.

Keywords: SOX; Internal control; Textual risk disclosure; Risk-related tones; Market liquidity; Investor-perceived risk (search for similar items in EconPapers)
JEL-codes: M41 M42 M48 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:53:y:2021:i:c:s0882611021000195

DOI: 10.1016/j.adiac.2021.100531

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