CFOs with prior audit experience and internal control quality

This paper examines the effect of the prior audit experience of chief financial officers (CFOs) on corporate information disclosure. Utilising a sample of 25,480 firm‐annual observations of A‐share Chinese listed companies over the period 2007–2019, we find that CFOs with audit experience improve the quality of corporate information disclosure. We also find that Big 4 auditor CFOs have a more positive influence on corporate information. Finally, we find that the power of CEOs influences the effect of CFOs’ audit experience on corporate disclosure quality. This study contributes to the selection of CFOs by listed companies with the aim to improve corporate governance mechanisms.

Prior Audit Experience and CFO Financial Reporting Aggressiveness

SUMMARY In this study, we investigate the financial reporting behavior of chief financial officers (CFOs) with significant prior audit experience. Our tests indicate that, on average, CFOs who were former audit managers or partners report less aggressively than CFOs without prior audit experience. Thus, the mindset that auditors develop during their time in public accounting—which should value objective, transparent, and conservative financial reporting—appears to persist when auditors take high-level positions in industry. However, we also find that the reporting behavior of prior-auditor CFOs becomes more aggressive over time as the salience of their audit experience decays. Further, we find that audit fees are lower for clients with prior-auditor CFOs but increase as the CFOs' time away from auditing increases. Overall, our study offers important insights regarding how audit experience is associated with the financial reporting behavior of CFOs. Data Availability: All data used are publicly available.

PurposeThis paper examines how “strategic” chief financial officers (CFOs) with an elite MBA (i.e. elite CFOs) influence (1) stock market reaction to CFO hiring announcements (ex antemeasure) and (2) post-hiring firm performance (ex-post measure).Design/methodology/approachThis paper utilizes a comprehensive, proprietary database with information about the educational qualifications and prior professional experience of 1,340 CFOs hired during the period 1994–2014. For each CFO, the authors hand-collected data on the CFO's prior experience as well as CFO's educational profile. The authors also identified the date of CFO hiring from financial press articles. To evaluate performance, the authors consider two different, yet complementary performance measures: (1) the stock market reaction,a priorimeasure and (2) a traditional measure of performance, which is a post-facto metric related to firm performance.FindingsThe results show that hiring CFOs with scarce and strategic human capital elicits a positive market response and leads to significant improvement in firm performance. Further, firms with greater managerial discretion benefit more from hiring elite CFOs. The results hold after controlling for chief executive officer (CEO), CFO, top managment team (TMT), and board characteristics.Originality/valueThis study shows converging and mutually consistent results about what specific types of CFO human capital create firm value and, more importantly, show that such value-creation is only in the case of small firms and high growth firms. The study also advances the stream of literature that contrasts the relative benefits of specialist versus generalist qualifications.

Purpose - This study examines whether Chief Audit Executive characteristics, namely gender, knowledge, experience, and training, influence internal audit effectiveness and whether internal audit effectiveness affects internal control quality among publicly listed companies in Malaysia. In addition, the study investigates the mediating role of internal audit effectiveness in the relationship between Chief Audit Executive characteristics and internal control quality. Design/methodology/approach – This study adopts a quantitative research design using primary data collected through an online survey administered to publicly listed companies in Malaysia. The unit of analysis is at the organisational level, with a total of 272 usable responses obtained for analysis. Data are analysed using the Statistical Package for the Social Sciences and Smart Partial Least Squares. Findings – The findings indicate that Chief Audit Executive knowledge, experience, and training have a significant positive effect on internal audit effectiveness, while gender is not found to be a significant determinant. Internal audit effectiveness is shown to have a strong positive relationship with internal control quality. Furthermore, the results reveal that internal audit effectiveness significantly mediates the relationship between Chief Audit Executive knowledge and experience and internal control quality. Practical Implications- The findings provide useful insights for regulators, professional bodies, and corporate boards, including the Institute of Internal Auditors, Bursa Malaysia, and the Securities Commission, in developing policies, guidelines, and competency frameworks aimed at strengthening internal audit functions and enhancing internal control quality in publicly listed companies. Originality/value – This study contributes to the internal audit and corporate governance literature by providing empirical evidence on the mediating role of internal audit effectiveness in the relationship between Chief Audit Executive characteristics and internal control quality within an emerging market context.

INTRODUCTION In a sense, I began developing this presentation in 1993 when I first taught auditing and internal control for M.B.A.s at INSEAD (European Institute of Administration). In designing the course, I envisioned myself as the CEO of a multinational corporation (as many M.B.A.s view themselves), and asked how would I know whether I was getting the right information for decision making, that my assets were being protected, and that my people were complying with laws, regulations, and company policy--all on a worldwide basis? As I pondered these questions, it came to me that an answer to all of them is internal control. This revelation changed my thinking about internal control, changed the tone of the M.B.A. course, and also changed my teaching for majors,(1) I now believe that knowledge about internal control is an essential element that affects the welfare of management, corporate directors, shareholders, trading partners of an entity, auditors, and society at large--yet it is relatively unexplored by researchers. All major research methods are applicable, we have conceptual documents to guide our inquiries, and internal control quality is regulated directly or indirectly in many countries. In short, there is an outstanding opportunity for research in internal control for and auditing professors, and for Ph.D. students. There are substantial barriers, of course, and we must all work to overcome them. The rest of this paper explores research opportunities in internal control quality assurance beginning with a definition of internal control and the demand for internal control quality and quality assurance. This is followed by a discussion of barriers to research, and concludes with research questions and trends for the future. DEMAND FOR INTERNAL CONTROL QUALITY AND QUALITY ASSURANCE Because I am most familiar with them and because other groups around the world have conceptually similar definitions, I will use the Committee of Sponsoring Organizations of the Treadway Commission definition of internal control (COSO 1992) supplemented by that of Criteria of Control (CoCo, CICA 1995).(2) COSO defines internal control as: a process, effected by an entity's board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categories: * effectiveness and efficiency of operations * reliability of financial information * compliance with the applicable laws and regulations (COSO 1992) (emphasis added) The COSO definition implicitly assumes a constant external environment. The Canadians' CoCo adds the risk of failure to maintain the organization's capacity to identify and exploit opportunities, and resilience or capacity to respond or adapt to unexpected risks and opportunities. Thus, CoCo assumes the external environment may change, and defines good internal control to include adaptability of the process to a changing external environment. The COSO/CoCo definitions have three distinguishing features. First, they are broad, much broader than traditional definitions of internal accounting control that are limited to reliability of data and protection of tangible assets. By including the efficiency and effectiveness of operations, compliance with laws and regulations, and responsiveness to external changes, the COSO/CoCo definitions can be interpreted to cover all of management's functions except choosing objectives, strategies to achieve objectives, and follow up of surprises identified. Second, the COSO/ CoCo definitions are about process, rather than about a static state. This means that internal control cannot be directly observed or verified. Third, internal control is about risk, or threats that an entity will not achieve its objectives. All decision makers want to optimize their risk/expected reward trade-off, thus leading to demand for internal control quality and quality assurance. …

CFOs with Social Connections to Audit Committees and Internal Control Quality

This study examines how chief financial officers’ (CFOs) social connections to the audit committee impact the quality of internal control over financial reporting (ICFR). Using restatements to identify firms with potential internal control weaknesses (ICWs) during restatement periods, we find that CFOs’ social connections to the audit committee are less likely to lead to disclosure of potential ICWs; instead, they are more likely to lead to reporting of potential ICWs for irregularity restatements. Firms with CFOs’ social connections to the audit committee exhibit higher financial reporting quality and reputational capital. The negative relation between the CFOs’ social connections to the audit committee and disclosure of potential ICWs is more pronounced for CFOs with higher reputational capital. Overall, this research elucidates how CFOs’ social connections to the audit committee can facilitate information exchange, enabling the CFO and the audit committee to effectively collaborate and monitor ICFR, which in turn diminishes the likelihood of potential ICWs occurring during restatement periods.

Whether internal controls can effectively constrain earnings management, which is a hot topic in recent years. I investigate the impact of internal control on earnings quality based on a life cycle perspective using data of listed companies of China’s market from 2010-2013. The empirical findings indicate that high quality internal control can suppress accrual earnings management and real earnings management (except for discretionary expenses manipulating earnings management) effectively, whilst in different life cycle stages (LCSs), the relation between internal control quality and accounting earnings quality (accrual quality and real earnings quality) is different. For the accrual quality aspect, in mature LCS, internal control quality and accrual quality is positively correlated. In growth or decline LCS, the relation between internal quality and accrual quality is not significant. For the real earnings quality aspect, in decline LCS, high quality internal control can improve real earnings quality; in growth LCS or mature LCS, the relation is just the opposite.

We use a new method to better measure internal control quality. Specifically, we construct an internal control index for all public firms in China, because the lack of internal control regulations during our sample period presents an interesting setting, in which the diversity of internal control quality is preserved. Two distinctive features set our index apart from the information currently available under SOX 404 in the U.S. First, it comprehensively evaluates a firm’s internal control, based on the COSO framework. Second, it quantitatively measures a firm’s internal control, using the analytic hierarchy process designed for analyzing complex decisions. We proceed to validate our index by confirming the known relation between internal control quality and earnings management. Further, we theorize that our internal control index has a positive impact on the earnings response coefficient, and find that better internal control indeed makes financial reporting more credible to investors.

A Comprehensive and Quantitative Internal Control Index: Construction, Validation, and Impact

52 SFPM working group on DBT internal quality control

This paper establishes the evaluation index system of the quality of internal control of commercial banks.Then the paper combined with the improved adding calculated by entropy method within the accrual cash flow model of quality control index, the presence of internal control and the level of accounting conservatism were considered.This paper aims at figuring the relationship between the ability to internal control and accounting conservatism of listed commercial banks through the study, the representative of the financial field of the enterprises to strengthen internal control system to establish and improve the theoretical basis of information disclosure quality.

PurposeThis paper aims to investigate the association between internal audit function (IAF) characteristics and internal control quality.Design/methodology/approachUsing data gathered from 59 chief audit executives from Tunisian listed companies, this paper uses a regression model to examine research hypothesis related to the association between IAF characteristics and internal control quality.FindingsThe findings of the current study reveal that internal control quality is significantly and positively associated with IAF competence, internal audit quality control assurance level, follow-up process and audit committee’s involvement in reviewing the internal audit program and results.Practical implicationsThe findings have significant implications for IAF wishing to enhance their effectiveness, by recognizing the impact of the IAF’s characteristics on internal control quality. The findings of this study also have significant implications for regulatory bodies who are concerned with the internal control quality, managers and audit committees who determine IAF investment, oversight IAF activities and assess internal auditors’ performance.Originality/valueThis study helps fill a gap in the extant literature where existing empirical evidence of how the IAF characteristics influences the quality of the financial reporting process in emerging markets is scant.

Digital transformation has become a new engine driving the development of enterprises. Based on the data of Chinese A-share listed manufacturing enterprises from 2008 to 2020, this paper measured the intensity of enterprise digital transformation with the help of machine learning method, and empirically investigated the impact mechanism of digital transformation on the quality of enterprise's internal control. It is found that digital transformation can significantly improve the quality of internal control. Mechanism analysis shows that digital transformation has a positive impact on the quality of internal control mainly by reducing agency costs and increasing the shareholding ratio of institutional investors. The results of heterogeneity analysis indicate that the promotion effect of digital transformation on the quality of internal control is more significant in enterprises with small scale and strong manager's ability. Digitization improves the total factor productivity of enterprises by promoting the quality of internal control.