Firm culture and internal control system

Margaret A. Abernethy, Wei Li, Yunyan Zhang and Hanzhong Shi

Accounting and Finance, 2023, vol. 63, issue 3, 3095-3123

Abstract: The corporate culture within firms is a significant concern for regulators, shareholders and other stakeholders. Drawing on a large sample of US firms, we use the political preferences of the top management team (TMT) to proxy for a firm's culture and examine whether it influences the decision to implement an effective internal control system (ICS) and whether the ICS plays a mediating role between the culture created by the TMT and financial reporting quality. We find that a Republican‐leaning TMT with a more conservative ideology is associated with a more effective internal control system. In addition, the TMT's political preferences affect financial reporting quality, both directly and indirectly, via the internal control system. A range of robustness tests reinforces our main findings.

Date: 2023
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