Board monitoring and internal control system disclosure in different regulatory environments

Abstract

Purpose\ud – The purpose of this paper is to investigate two research questions. Is internal control system (ICS) disclosure, as a monitoring mechanism, associated with the characteristics of the board of directors, particularly the audit committee as the main board committee devoted to the effectiveness of ICS? Does the regulatory environment, particularly the regulation on ICS disclosure as an external governance/monitoring mechanism play a role in shaping the relationship between board monitoring and ICS disclosure and, if so, how?\ud \ud Design/methodology/approach\ud – The authors study the ICS disclosure of 149 companies listed in four European financial markets (London, Paris, Frankfurt and Milan), each with its own regulations about ICS disclosure, during a six-year period (2003-2008).\ud \ud Findings\ud – The findings support an inverse association between the extent of ICS disclosure and the proxies for board monitoring. The authors also find a statistically significant negative relationship between board monitoring and substantial ICS disclosure but no relationship between board monitoring and formal ICS disclosure. The evidence also shows that the regulatory environment moderates the relationship between board monitoring and ICS disclosure by introducing trade-offs among monitoring mechanisms.\ud \ud Research limitations/implications\ud – An important caveat of the research is that it does not explore if and how investors use ICS disclosure to evaluate the firm.\ud \ud Practical implications\ud – The authors propose a framework for the analysis of ICS disclosure that overcomes limitations of previous literature that has neglected the importance of the content beyond the extent of ICS disclosure. Through this framework researchers, practitioners and standard setters are able to separate merely descriptive, formal un-useful disclosure (boilerplate information) on the composing elements of the ICS from substantial disclosure regarding the functioning of the ICS (monitoring function).\ud \ud Originality/value\ud – The authors also provide evidence that the relationship between board monitoring and ICS disclosure varies with the content of the information communicated, thus offering guidance for future research not to focus on measuring the extent or quantity of disclosure but on the variety and complexity of the information communicated

CEO financial background and internal control weaknesses

“…We also control for the other CEO characteristics. Previous studies have found a significant association between the other CEO characteristics (such as tenure, duality, and gender) and ICWs (Lin et al, ; Michelon et al, ; Yazawa, ). If CEOs' financial expertise is correlated with these characteristics, then our results may be biased due to an omitted‐variable problem.…”

“…Given the consequences of ICWs, researchers have extensively explored the determinants of ICWs, such as firm‐level factors (e.g., firm size, age, complexity, growth, diversification, and corporate governance) and external factors (e.g., external auditor, regulations, and national culture; see Chalmers, Hay, & Khlif, , for a review). In particular, previous studies have documented the link between ICWs and management‐level factors, such as CEO entrenchment, age, and gender (Lin, Wang, Chiou, & Huang, ); CEO duality (Michelon, Bozzolan, & Beretta, ); and CEO tenure (Yazawa, ). However, to the best of our knowledge, the link between CEOs' financial background and ICWs remains unexplored.…”

Gender diversity on boards and forward-looking information disclosure: evidence from Jordan

“…Since FLID capture current plans and future forecasts (Hussainey et al, 2003), the lack of sufficient FLID may end up with volatile stock prices and uncertainty in investments. The "traditional" reporting, largely based on financial statements has been questioned in terms of its ability to meet the increasing information needs (Michelon et al, 2015). It is quite challenging for many users understand the elements of financial statements without narrative explanations due to the increasing complexity of regulations, business contexts, firm's strategies and operations makes.…”

“…In fact, narrative disclosures contribute not only through the clarification of quantitative and financial measures but also through the identification of value-generation drivers not represented well in the financial statements (e.g. Schleicher et al, 2007;Souabni, 2011;Michelon et al, 2015).…”

Environmental and Social Matters in Mandatory Corporate Reporting: An Academic Note

“…The mandatory reporting of environmental and social matters has come a very long way in a relatively short time. However, subject to management discretion and incentives, mandated disclosure can be either a substantial source of information that is useful in supporting investors’ and stakeholders’ judgment, or simply a formal box‐ticking task (Michelon, Bozzolan, and Beretta, ).…”