Firm culture and internal control system |
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Authors: | Margaret A. Abernethy Wei Li Yunyan Zhang Hanzhong Shi |
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Affiliation: | 1. Department of Accounting, University of Melbourne, Melbourne, Victoria, Australia;2. Department of Accounting, University of Adelaide, Adelaide, South Australia, Australia;3. Department of Accounting, Nanjing University, Nanjing, China |
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Abstract: | The corporate culture within firms is a significant concern for regulators, shareholders and other stakeholders. Drawing on a large sample of US firms, we use the political preferences of the top management team (TMT) to proxy for a firm's culture and examine whether it influences the decision to implement an effective internal control system (ICS) and whether the ICS plays a mediating role between the culture created by the TMT and financial reporting quality. We find that a Republican-leaning TMT with a more conservative ideology is associated with a more effective internal control system. In addition, the TMT's political preferences affect financial reporting quality, both directly and indirectly, via the internal control system. A range of robustness tests reinforces our main findings. |
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Keywords: | firm culture internal control political preferences |
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