The Quality of Internal Control over Financial Reporting in Family Firms

Bardhan, Indranil R.; Lin, Shu; Wu, Shu Ling

doi:10.2308/acch-50935

Cited by 73 publications

(78 citation statements)

References 56 publications

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“…The evidence on transparency by family firms is also mixed. In the United States , Anderson, Duru, and Reeb () and Bardhan, Lin, and Wu () find more internal control weaknesses and higher opacity in family firms; however, Ali, Chen, and Radhakrishnan () find better earnings quality but fewer governance related disclosures. At the international level, several papers find that earnings management increases with the divergence of cash‐flow and control rights e.g.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

How Does Regulation Affect the Relation Between Family Control and Reported Cash Flows? Comparative Evidence from India and the United States

Nagar¹,

Sen²

2016

Corporate Governance

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Manuscript Type Empirical. Research Question/Issue We conduct a two‐country study to understand (i) how family and non‐family firms engage in classification shifting to manage reported operating cash flows in each country; (ii) how this behavior varies between the two countries; and (iii) how corporate governance regulation introduced independently in each country moderates the observed behavior. Research Findings/Insights We find that family ownership has different effects on quality of cash flow reporting in the two countries. Furthermore, country‐level regulation moderates these effects differently. In particular, (i) firms in both countries engage in manipulating operating cash flows, but the evidence is stronger in the United States; (ii) family firms in India engage in more shifting than non‐family firms, but this is not observed in the United States; and (iii) family (non‐family) firms in India increase (reduce) shifting, whereas only non‐family firms in the United States increase shifting after regulation. Since non‐family firms in India raise more external capital than family firms after regulation, we infer that family firms in India reacted to this competition for capital and resorted to shifting. Theoretical/Academic Implications Most studies assume that the incentives for family firm behavior are the same in different market settings. However, factors such as efficiency of public capital markets, enforcement of corporate laws and regulations, and other institutional practices can cause differences in family firm behavior across different market settings. We investigate the behavior of family and non‐family firms in each of these markets and study how a feature of the national governance system, regulatory design, moderates this behavior. Practitioner/Policy Implications Our findings should be useful to global investors and regulators in both emerging and developed markets. The results indicate how similar regulation in the two different settings can trigger differences in the behavior of firms.

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

How Does Regulation Affect the Relation Between Family Control and Reported Cash Flows? Comparative Evidence from India and the United States

Nagar¹,

Sen²

2016

Corporate Governance

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“…Accordingly, we control for the characteristics of the board of directors including size (BDSIZE) and independence (BDIND), which could affect the ICWs (Johnstone, Li, & Rupley, 2011;Chen, Knechel, Marisetty, Truong, & Veeraraghavan, 2017). Finally, previous studies demonstrate that there is a significant association between ownership structure (institutional ownership and ownership concentration; Deumes & Knechel, 2008;Ji, Lu, & Qu, 2015) and family ownership (Bardhan, Lin, & Wu, 2015;Weiss, 2014) with ICWs. Therefore, we include the institutional ownership…”

Section: Model Specificationmentioning

confidence: 99%

CEO financial background and internal control weaknesses

Oradi

Asiaei

Rezaee

2020

Corporate Governance

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Research question/issue The existing literature documents that the functional expertise of Chief Executive Officers (CEOs) in finance reduces poor performance risk, improves financial reporting quality, and mitigates audit risk. In this study, we examine the association between CEOs' financial background and internal control weaknesses (ICWs). Research findings/insights Using a sample of Iranian listed companies for the period 2007–2017, we find a significant negative association between CEOs with financial expertise and ICWs. Furthermore, we show that the negative association between CEO financial expertise and ICWs is stronger if the CEO is recruited from inside the firm. Our main results are robust after controlling for the potential selection issue, random effects at the firm level, and the impact of the new Iranian internal control regulations. Moreover, our results remain unchanged after controlling for other CEO characteristics, audit committee characteristics, audit fees, and using an alternative measure of financial expertise. Theoretical/academic implications Our study contributes to the extant literature by examining the association between CEOs' financial background and ICWs, a theme that remains largely unexplored in previous research. We also extend the literature on CEO succession origin. Practitioner/policy implications This study has important implications for regulators regarding the improvement of financial reporting quality and the effectiveness of internal controls, especially in the emerging markets. Particularly, our findings may be of benefit to auditors when assessing the risks regarding their clients' material weaknesses, as well as to shareholders and boards of directors when hiring a new CEO.

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“…Not many researchers have studied the effect of moderating family ownership on the relationship between internal control and tax avoidance. Bardhan et al (2014) proved that family ownership causes ineffective internal control. Annuar et al (2014) provided empirical evidence that family ownership affects tax avoidance.…”

Section: Family Ownership Internal Control and Tax Avoidancementioning

confidence: 99%

The effect of internal control on tax avoidance: the case of Indonesia

Bimo

Prasetyo

Susilandari

2019

JED

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Purpose The purpose of this paper is to analyze the effect of internal control on tax avoidance analyzing internal (family ownership) and external (environmental uncertainty) factors on the effectiveness of internal control in preventing tax avoidance. Design/methodology/approach First, the authors examine the direct effect of the effectiveness of internal control on tax avoidance. Second, the authors examine the effect of moderation of family ownership and environmental uncertainty on the relationship of the effectiveness of internal control on tax avoidance. Third, the authors divide the full sample into two groups, high and less effectiveness of internal control to examine the direct effect of internal control effectiveness on tax avoidance and when considering moderating variables. Fourth, the authors use two different measures of the effectiveness of internal control. Findings This research found that effective internal control can reduce tax avoidance. Family ownership affects the relationship between internal control and tax avoidance, but environmental uncertainty does not influence the relationship between internal control and tax avoidance. Practical implications Internal control increases compliance with rules and policies, so companies must design and implement effective internal control to prevent tax avoidance activities in violation of tax regulations. Originality/value In contrast to previous studies, this study measures the effectiveness of internal control using the index of internal control practice disclosure and considers internal and external factors that can affect the effectiveness of internal control to prevent tax avoidance.

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The Quality of Internal Control over Financial Reporting in Family Firms

Cited by 73 publications

References 56 publications

How Does Regulation Affect the Relation Between Family Control and Reported Cash Flows? Comparative Evidence from India and the United States

How Does Regulation Affect the Relation Between Family Control and Reported Cash Flows? Comparative Evidence from India and the United States

CEO financial background and internal control weaknesses

The effect of internal control on tax avoidance: the case of Indonesia

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