TY - JOUR
T1 - Internal control weakness and corporate employment decisions
T2 - evidence from SOX Section 404 disclosures
AU - Cao, Zhangfan
AU - Chen, Steven Xianglong
AU - Jiang, Mengfei
AU - Xiang, Mengyuan
N1 - Funding Information:
We would like to thank the Editor (Giovanna Michelon), the Associate Editor (Andrei Filip) and two anonymous reviewers for their constructive comments that have significantly improved our study. Steven Chen gratefully acknowledges the financial support from Probationer Funding Scheme at the University of Liverpool Management School.
Publisher Copyright:
© 2022 University of South Australia.
PY - 2022/12/2
Y1 - 2022/12/2
N2 - This study investigates the impact of material internal control weaknesses on corporate employment decisions. We find that, on average, ineffective internal control is significantly related to lower efficiency in employment decisions. We also find that firms with material internal control weaknesses are associated with both over-investment and under-investment in labour. Further analysis suggests that the negative impact of internal control weaknesses on employment decisions is predominantly driven by more severe types of weakness that have a pervasive effect on internal reporting and those related to core accounts. Moreover, our change analysis shows that the remediation of material weaknesses contributes to an improvement in labour investment efficiency. Finally, consistent with the effective monitoring role of high-skilled employees, our subsample analysis indicates that the negative impact of internal control weaknesses on labour investment efficiency is mitigated in firms with high reliance on human capital. Our findings are robust to various sensitivity checks including propensity score matching, entropy balancing, removal of observations during the financial crisis, various measures for the efficiency of investment in labour, and the adjustment for employing residuals as outcome variables. Overall, our study contributes to the ongoing debate on the net benefits of SOX 404 by highlighting the significant value of internal control systems to efficient human capital investment and provides timely implications for managers and regulators.
AB - This study investigates the impact of material internal control weaknesses on corporate employment decisions. We find that, on average, ineffective internal control is significantly related to lower efficiency in employment decisions. We also find that firms with material internal control weaknesses are associated with both over-investment and under-investment in labour. Further analysis suggests that the negative impact of internal control weaknesses on employment decisions is predominantly driven by more severe types of weakness that have a pervasive effect on internal reporting and those related to core accounts. Moreover, our change analysis shows that the remediation of material weaknesses contributes to an improvement in labour investment efficiency. Finally, consistent with the effective monitoring role of high-skilled employees, our subsample analysis indicates that the negative impact of internal control weaknesses on labour investment efficiency is mitigated in firms with high reliance on human capital. Our findings are robust to various sensitivity checks including propensity score matching, entropy balancing, removal of observations during the financial crisis, various measures for the efficiency of investment in labour, and the adjustment for employing residuals as outcome variables. Overall, our study contributes to the ongoing debate on the net benefits of SOX 404 by highlighting the significant value of internal control systems to efficient human capital investment and provides timely implications for managers and regulators.
KW - internal control
KW - investment efficiency
KW - labour investment
KW - material weakness
KW - remediation
KW - Sarbanes-Oxley Section 404
UR - http://dx.doi.org/10.1080/01559982.2022.2147470
U2 - 10.1080/01559982.2022.2147470
DO - 10.1080/01559982.2022.2147470
M3 - Article
SN - 0155-9982
JO - Accounting Forum
JF - Accounting Forum
ER -