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Firm culture and internal control system

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  • Margaret A. Abernethy
  • Wei Li
  • Yunyan Zhang
  • Hanzhong Shi

Abstract

The corporate culture within firms is a significant concern for regulators, shareholders and other stakeholders. Drawing on a large sample of US firms, we use the political preferences of the top management team (TMT) to proxy for a firm's culture and examine whether it influences the decision to implement an effective internal control system (ICS) and whether the ICS plays a mediating role between the culture created by the TMT and financial reporting quality. We find that a Republican‐leaning TMT with a more conservative ideology is associated with a more effective internal control system. In addition, the TMT's political preferences affect financial reporting quality, both directly and indirectly, via the internal control system. A range of robustness tests reinforces our main findings.

Suggested Citation

  • Margaret A. Abernethy & Wei Li & Yunyan Zhang & Hanzhong Shi, 2023. "Firm culture and internal control system," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3095-3123, September.
    • Handle: RePEc:bla:acctfi:v:63:y:2023:i:3:p:3095-3123
    DOI: 10.1111/acfi.13020
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