National Culture and Internal Control Material Weaknesses Around the World

Abstract

The scandals surrounding questionable accounting practices and corporate wrongdoing during 2000-2008 have often been attributed to the lack of effective internal controls. We examine the relations between national culture and the incidence and the number of reported internal control material weaknesses (ICMW). We focus on three dimensions of national culture, individualism, uncertainty avoidance, and power distance (as identified by Hofstede (2001)), which we hypothesize are related to ICMW. Consistent with our hypotheses, cross-country analysis indicates that individualism and power distance are positively related, and uncertainty avoidance is negatively related, to the existence of ICMW. We also find a significant positive relation between individualism and the number of ICMW. These results are robust to variety of sensitivity tests. Additionally, we document that all three dimensions of national culture influence the propensity to remediate previously identified ICMW.