Mandatory Internal Control Audits and the Manipulation of Annual Report Text Tone: A Risk Exposure-Based Perspective

Zhongliang Zheng, Gongyu Huang, Kefu Lyu and Zijin Wang

Emerging Markets Finance and Trade, 2025, vol. 61, issue 15, 4795-4807

Abstract: Internal control auditing is crucial in corporate governance, and its system has been evolving in various countries. China has gradually promoted mandatory internal control auditing since 2010, however, its impact on the tone manipulation of corporate annual reports is yet to be deeply explored. Using a sample of A-share listed companies from 2007 to 2022, this paper finds that mandatory internal control audits induce firms to engage in tone manipulation of annual report texts. From the logical premise, the policy enhances firms’ risk exposure and regulatory risk, and firms have incentives to manipulate the tone to manage the impression in order to cope with the risk. This paper expands the field of research on the economic consequences of internal control auditing and the factors influencing tone manipulation of annual report texts, providing new perspectives for understanding management’s opportunistic disclosure behavior, as well as providing a reference basis for regulators and investors.

Date: 2025
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DOI: 10.1080/1540496X.2025.2525373

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