Abstract
AbstractThis study examines whether the presence of private lenders is associated with the effectiveness of borrowers’ internal controls. I provide evidence that the presence of private lenders is an important determinant of internal control weaknesses in borrower firms. To monitor loan contracts, lenders use borrowers’ financial information, reliability of which to a great extent depends on the effectiveness of borrowers’ internal controls. I argue that lenders are likely to influence borrowers to maintain effective internal controls so that they can reliably use borrowers’ financial reporting information. Using a battery of tests, I find that the presence of private lenders has a significant negative association with the probability of borrowers’ disclosing a material weakness in internal controls.
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