Trust and Financial Reporting Quality |
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Authors: | JACE GARRETT RANI HOITASH DOUGLAS F. PRAWITT |
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Affiliation: | 1. Department of Accountancy, Bentley University;2. Marriott School of Management, Brigham Young University |
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Abstract: | Using unique survey data from Great Place to Work® Institute, we investigate the association of intraorganizational trust (i.e., employees’ trust in management) with three aspects of financial reporting: accruals quality, misstatements, and internal control quality. We find that trust is associated with better accrual quality, lower likelihood of financial statement misstatements, and lower likelihood of internal control material weakness disclosures. However, these effects are not uniform across all companies. Consistent with trust improving financial reporting quality through improved information production and information sharing, we find that trust is significantly associated with financial reporting quality in relatively decentralized firms, but not in firms that are relatively centralized. Our results are robust to several analyses that attempt to control for potential alternative explanations. |
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Keywords: | M14 M41 M54 trust information sharing accruals internal control misstatements |
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