Internal Controls and Conditional Conservatism

50 Pages Posted: 10 Feb 2009 Last revised: 9 Apr 2013

See all articles by Beng Wee Goh

Beng Wee Goh

Singapore Management University - School of Accountancy

Dan Li

Tsinghua University - School of Economics and Management

Date Written: October 18, 2010

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.

Keywords: internal control, conservatism, material weaknesses, disclosure, Sarbanes-Oxley Act

JEL Classification: G14, M41, M43, G34, G38

Suggested Citation

Goh, Beng Wee and Li, Dan, Internal Controls and Conditional Conservatism (October 18, 2010). Accounting Review, Vol. 86, No. 3, 2011, Available at SSRN: https://ssrn.com/abstract=1340286

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Dan Li (Contact Author)

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

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