New Evidence on the Determinants of Internal Control Weaknesses

Iranian Journal of Accounting, Auditing and Finance

مقاله 3، دوره 3، شماره 2، مرداد 2019، صفحه 65-81  

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.v3i2.88836

نویسندگان

Vahab Rostami ¹؛ Zeynab Bazarghani¹؛ Abbas Rostami²

¹Department of Accounting, Payame Noor University, Tehran, Iran

²Department of Accounting, Zanjan Branch, Islamic Azad University, Zanjan, Iran

چکیده

The present study evaluates whether there is a significant relationship between investment, earnings management, ownership structure, and internal control weaknesses.
For the study purpose, panel data, including the financial variables of sample companies listed on the Tehran Stock Exchange, were evaluated during 2012-2018. To test the hypothesis, we analyzed the effect of seven descriptive variables on the dependent variable of internal control weakness; three models of Logit Pooled, LPM Pooled, and Probit Pooled are used for hypothesis testing.
The results showed a negative and significant relationship between board compensation, real earnings management, accrual earnings management, capital structure, family ownership, and internal control weakness. Moreover, a positive and meaningful relationship was discovered between institutional ownership and internal control weaknesses.
The current study's outcomes significantly show the relationship between internal control weaknesses, investment, earnings management, and firm ownership in a developing country.

کلیدواژه‌ها

internal control weakness؛ Earnings management؛ Ownership Structure؛ Financial reporting quality

مراجع

Abbadi, S.S. Higazi, Q.F. and Al-Rahahleh, A.S. (2016), “Corporate Governance Quality and Earnings Management: Evidence from Jordan”. Australasian Accounting Business and Finance Journal, Vol. 10, No. 2, pp. 54-75, DOI: http://dx.doi.org/10.14453/aabfj.v10i2.4

Alali, F. (2011). "Audit fees and discretionary accruals: compensation structure effect". Managerial auditing journal, Vol. 26, No. 2, pp. 90-113. https://doi.org/10.1108/02686901111094994

Al-Bassam, W. (2014). “Corporate governance, voluntary disclosure and financial performance: an empirical analysis of Saudi listed firms using a mixed methods research design”, Ph.D. thesis, University of Glasgow. https://core.ac.uk/download/pdf/42373410.pdf

Alhadab, M., and Clacher, I. (2017). “The impact of audit quality on real and accrual earnings management around IPOs”. The British Accounting Review, https://doi.org/10.1016/j.bar.2017.12.003

Andreou, P. Louca, C. and Panayides, P. (2014), “Corporate governance, financial management decisions and firm performance, Evidence from the maritime industry”. Transportation Research Part E: Logistics and Transportation Review, Vol. 63, No. 3, pp. 59-78. http://dx.doi.org/10.1016/j.tre.2014.01.005

Ball, R. and Shivakumar, L. (2005), “earnings quality in U.K. private firms: comparative loss recognition timeliness”. Journal of Accounting and Economics, Vol. 39, No. 1, pp. 83-128, https://doi.org/10.1016/j.jacceco.2004.04.001

Benjamin, C. Hatfield, R.C., and Houston, R.W. (2018). “The effect of real earnings management on auditor scrutiny of managements other financial reporting decisions”, The Accounting Review, http: //doi.org/10.2308/accr-52032

Beuselinck, C. Cascino, S. Deloof, M., and Vanstraelen, A. (2014). “Earnings Management within Multinational Corporations”. Available at SSRN: http:// ssrn.com/ abstract=1599678. http://dx.doi.org/10.2139/ssrn.1599678

Block, J.H. Jaskiewicz, P., and Miller, D. (2011). “Ownership versus management effects on performance in family and founder companies: A Bayesian reconciliation”. Journal of Family Business Strategy, Vol. 2, No. 4, pp. 232-245. https://doi.org/10.1016/j.jfbs.2011.10.001

Chendra-mouli, V. Plesons, M. Sullivan, E. and Say, L. (2018), “38.8 million Additional modern contraceptive users: this, in fact, is "never-before opportunity to strengthen investment and action on adolescent contraception", Reproductive Health., Vol. 15, No. 1, https://doi.org/10.1186/s12978-018-0457-z

Chiraz, B.A., and Lesage, C. (2012). “Audit pricing and nature of controlling shareholders: Evidence from France”, China Journal of Accounting Research, Vol. 6, No. 1, pp. 21–34, https://doi.org/10.1016/j.cjar.2012.08.002

Chuen, D.L. Li, G., and Wang, Y. (2018). “Cryptocurrency: Anew investment opportunity?”, The journal of alternative investments, Vol. 20, No. 3, pp. 16-40, DOI: https://doi.org/10.3905/jai.2018.20.3.016

Chung, K. and Zheng, H. (2011), “Corporate governance and institutional ownership”, Journal of financial and quantitative Analysis, Vol. 46, NO. 1, PP. 247-273, https://doi.org/10.1017/S0022109010000682

Datta, T.K. (2017). “Inventory system with defective products and investment opportunity for reducing defective proportion”. Operational Research, Vol. 17, No. 1, pp. 297-312. https://link.springer.com/article/10.1007%2Fs12351-016-0227-z

Ding, R. Jialong, L., and Wu, Z. (2018). “Government affiliation, real earnings management, and firm performance: the case of privately held firms”, Journal of business research, Vol. 83, pp. 138-150. https://doi.org/10.1016/j.jbusres.2017.10.011

Einhorn, E. Langberg, N. and Versano, T. (2018), “cross firm real Earnings management”. Journal of Accounting research, Vol. 56, No. 3, pp. 883-911, https://doi.org/10.1111/1475-679X.12188

Friese, A. Link, S., and Mayer, S. (2008). “corporate governance- The state of the art”, In Tax and corporate governance, pp. 357-425, DOI 10.1007/978-3-540-77276-7_25

Gady, J. Li, Y. Li, T., and Zheng, S.X. (2018), “internal control weakness, investment, and firm valuation”. Finance Research Letters, Vol. 25, pp. 165-171, https://doi.org/10.1016/j.frl.2017.10.018

Giriati. (2016). “Free cash flow, dividend policy, investment opportunity set, opportunistic behavior, and firm's value”. Procedia - Social and Behavioral Sciences, Vol. 219, pp. 248-254, https://doi.org/10.1016/j.sbspro.2016.05.013

Gloria, S. and Mantovani, G.M. (2017), “On the Shareholders’ Composition of the Company and the Governance Mechanisms of the Firm. Can this Contribute to the Firm Performance (Including the Capacity to Attract Capital and Bank Allowances)?”, Available at SSRN: https://ssrn.com/abstract=2907278 or http://dx.doi.org/10.2139/ssrn.2907278 (accessed 28 January 2019).

Gomes, A.P.M. (2016). “Corporate Governance Characteristics as a Stimulus to Tax Management”. Revista Contabilidade & Finanças, Vol. 27, No. 71, pp. 149-168. http://dx.doi.org/10.1590/1808-057x201500750

Goncharov, I. and Zimmermann, J. (2012). ‘Earnings management when incentives compete: the role of tax accounting in Russia”. Journal of International Accounting Research, Vol. 5, No. 1, pp. 41-65. tps://doi.org/10.2308/jiar.2006.5.1.41

Hu, J. Li, A. and Zhang, F. (2014), “Does Accounting Conservatism Improve the corporate information environment?”. Journal of International Accounting, auditing and Taxation, Vol. 23, No. 1, pp. 32-43, ttps://doi.org/10.1016/j.intaccaudtax.2014.02.003

Huang, W. Ying, T., and Shen, Y. (2018). “Executive cash compensation and tax aggressiveness of Chinese firms”. Review of Quantitative Finance and Accounting, pp. 1-30, DOI: 10.1007/s11156-018-0700-2

Ipion, E., and Parbonetti, A. (2016). “Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management”. Accounting and Business Research, Vol. 47, No. 1, pp. 91-121. https://doi.org/10.1080/00014788.2016.1238293

Isidro, H., and Marqes, A. (2013). “The effects of compensation and board quality on non-Gaap disclosures in Europe”, The International Journal of Accounting, Vol. 48, No. 3, pp. 289-317. https://doi.org/10.1016/j.intacc.2013.07.004

Jaggi, B. Leung, S., and Gul, F. (2009). “Family control, board independence, and earnings management: Evidence-based on Hong Kong firms”, Journal of Accounting and Public Policy. Vol. 28, No. 4, pp. 281-300, https://doi.org/10.1016/j.jaccpubpol.2009.06.002

Jarvinen, T. and Myllymaki, E.R. (2016), “Real earnings management before and after reporting sox 404 material weaknesses”. Accounting Horizons, Vol. 30, No. 1, pp. 119-141. https://doi.org/10.2308/acch-51310

Jiang, J. Dong, F., and Du, B. (2018). “Analysis on the factors affecting the capital structure of small and medium-sized enterprises in china”. Business & Economics, Vol. 8, No. 1, pp. 156-162. DOI: 10.4236/ajibm.2018.81010

Jong, L. Ho, P.L., and Elliott, C. (2018). “Inside the family: the impact of family and institutional ownership on executive remuneration”. Cogent Economics & Finance, Vol. 6, No. 1, https://www.tandfonline.com/doi/full/10.1080/23322039.2018.1432095

Kayo, E., and Ripamonti, A. (2016). “Corporate governance and capital structure in Brazil: stock, bonds, and substitution”. Mackenzie management review, Vol. 17, No. 5, pp. 85-109. http://dx.doi.org/10.1590/1678-69712016

Kayo, E.K. Brunaldi, E.O. and Aldrighi, D.M. (2018). “Capital structure adjustment in Brazilian family firms”. Revista de Administração Contemporânea, Vol. 22, No. 1, http://dx.doi.org/10.1590/1982-7849rac2018170004

Kim, J.B. Yeung, I. and Zhou, J. (2017), “stock price crash risk and internal control weakness”, Accounting and Finance, https://doi.org/10.1111/acfi.12273

Kothari, S. Leone, A.J., and Wasley, C.E. (2005). “Performance matched discretionary accrual measures”, Journal of accounting and economics, Vol. 39, No. 1, pp. 163-197. https://doi.org/10.1016/j.jacceco.2004.11.002

Lenard, M.J. Petruska, K.A. Alam, P. and Yu, B. (2016), “Internal control weaknesses and evidence of real activities manipulation”. Advances in Accounting, Vol. 33, pp. 47-58, https://doi.org/10.1016/j.adiac.2016.04.008

Lin, L. Wu, C. M. Fang, T.Y. and Wun, G.C. (2014). "The relation among accounting conservatism, institutional investors and earnings manipulation". Economic Modeling, Vol. 37, pp. 164-174. DOI: 10.1016/j.econmod.2013.10.020

McConaughy, D.L. Matthews, CH., and Fialko, F.A. (2011). “Founding Family Controlled Firms: Performance, Risk, and Value”. Journal of Small Business Management, Vol. 39, NO. 1, PP. 31-49. http://dx.doi.org/10.1111/0447-2778.00004

Miguel, a. Ederer, F. Gine, M. and Schmalz, M. (2018), “Common Ownership, Competition, and Top Management Incentives”. Ross School of Business, https://ssrn.com/abstract=2802332 or http://dx.doi.org/10.2139/ssrn.2802332

Miko, N.U. and Kamardin, H. (2015). “Impact of Audit Committee and Audit Quality on Preventing Earnings Management in the Pre - and Post- Nigerian Corporate Governance code 2011”. Procedia - Social and Behavioral Sciences, Vol. 172, No. 27, pp. 651-657. https://doi.org/10.1016/j.sbspro.2015.01.415

RamaIho, J.J.S. Rita, R., and Silva, J.V. (2018). “The impact of family ownership on the capital structure of firms: exploring the role of zero-leverage, size, location and the global financial crisis”, International Small Business Journal, DOI: 10.1177/0266242617753050

Roychowdhury, H. (2006). “Earnings management through real activities manipulation”. Journal of Accounting and Economics, Vol. 42, No. 3, pp. 335-370, https://doi.org/10.1016/j.jacceco.2006.01.002

Sayari, S., and Omri, A. (2017). “Earnings management, accruals, and stock liquidity”. Journal of finance and bank management, Vol. 5, No. 1, pp. 17-28, DOI: 10.15640/jfbm.v5n1a2

Schmidt, C., and Fahenbrach, R. (2016). “Do exogenous changes in passive institutional ownership affect corporate governance and firm value?”, Journal of financial economics, Vol. 124, No. 2, pp. 285-306. http://dx.doi.org/10.2139/ssrn.2177699

Stephan, ASchafer, D., and Mosquera, J. (2017). “Family ownership: does it matter for funding and success of corporate innovation?”, Small business economics, Vol. 48, No. 4, pp. 931-951. DOI: 10.1007/s11187-016-9813-y

Sun, L., and Al Farooque, O. (2018). “An exploratory analysis of earnings management before and after the governance and disclosure regulatory changes in Australia and New Zealand”. International Journal of Accounting & Information Management, Vol. 26, No. 1, pp. 81-114, https://doi.org/10.1108/IJAIM-09-2016-0087

Tadesse, A.F. and Murthy, U.S. (2018), “Nonprofessional investor perceptions of the partial remediation of IT and non-IT control weaknesses: An experimental investigation”, International Journal of Accounting Information Systems, Vol. 28, No. 3, pp. 14-30, https://doi.org/10.1016/j.accinf.2017.12.001

Wang, J. and Hooper, K. (2017), “Internal control and accommodation in Chinese organization”. Critical Perspectives on Accounting, Vol. 49, No C, pp. 18-30, DOI: 10.1016/j.cpa.2017.04.003