Internal control weakness and corporate employment decisions: evidence from SOX Section 404 disclosures

Zhangfan Cao, Steven Xianglong Chen, Mengfei Jiang and Mengyuan Xiang

Accounting Forum, 2024, vol. 48, issue 2, 225-250

Abstract: This study investigates the impact of material internal control weaknesses on corporate employment decisions. We find that, on average, ineffective internal control is significantly related to lower efficiency in employment decisions. We also find that firms with material internal control weaknesses are associated with both over-investment and under-investment in labour. Further analysis suggests that the negative impact of internal control weaknesses on employment decisions is predominantly driven by more severe types of weakness that have a pervasive effect on internal reporting and those related to core accounts. Moreover, our change analysis shows that the remediation of material weaknesses contributes to an improvement in labour investment efficiency. Finally, consistent with the effective monitoring role of high-skilled employees, our subsample analysis indicates that the negative impact of internal control weaknesses on labour investment efficiency is mitigated in firms with high reliance on human capital. Our findings are robust to various sensitivity checks including propensity score matching, entropy balancing, removal of observations during the financial crisis, various measures for the efficiency of investment in labour, and the adjustment for employing residuals as outcome variables. Overall, our study contributes to the ongoing debate on the net benefits of SOX 404 by highlighting the significant value of internal control systems to efficient human capital investment and provides timely implications for managers and regulators.

Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/01559982.2022.2147470 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:accfor:v:48:y:2024:i:2:p:225-250

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/racc20

DOI: 10.1080/01559982.2022.2147470

Access Statistics for this article

Accounting Forum is currently edited by Carol Tilt

More articles in Accounting Forum from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().