ECONOMIC CONSEQUENCES OF DISCLOSURE OF INFORMATION ON THE EFFECTIVENESS OF INTERNAL CONTROL OVER THE FINANCIAL REPORTING SYSTEM

Abstract

After the major corporate accounting scandals that happened at the beginning of the 21st century, many countries introduced the obligation to disclose information about the effectiveness of internal control over the financial reporting system. It was based on the assumption that mandatory reporting on internal control will encourage managers to pay more attention to the improvement of internal control over the financial reporting system and that this will lead to an improvement in the quality of financial statements and restore investor confidence in financial statements. The aim of this paper is to examine the economic consequences of the introduction of the obligation to disclose information on the effectiveness of internal control i.e., whether the assumed benefits have been realised. In order to realize the established goal, the author analyses the results of numerous empirical studies that investigated the impact of disclosure of information about the effectiveness of internal control on the quality of financial statements, the behaviour of investors and the behaviour of lenders. According to the author's findings, the obligation to disclose information about the effectiveness of internal control led to an improvement in the quality of financial statements. Also, the disclosure of this information has informational value for investors and lenders and affects their behaviour i.e., their risk assessment and the decisions they make.