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Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China

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  • Deng, Kebin
  • Hu, Fang
  • Tian, Gary Gang
  • Zhong, Ziying

Abstract

Using a sample of Chinese listed firms that are required to audit and disclose any internal control deficiency (ICD), this paper examines the effect of mandatory ICD disclosure on accrual quality (AQ) in China. We find that relative to voluntary ICD disclosure, mandatory ICD disclosure is associated with poorer AQ, as proxied by abnormal accruals, suggesting that the mandated disclosure of ICD effectively identifies financial reporting quality in Chinese firms. This relationship is enhanced by government control of firms (especially the central government) and by the intensity of government inspections and is stronger in undeveloped regional markets. The results are robust to the application of the PSM-DID method and use of different measures and samples. Our findings demonstrate the critical role of the mandated disclosure of ICD and improve our understanding of internal control mechanisms in emerging markets.

Suggested Citation

  • Deng, Kebin & Hu, Fang & Tian, Gary Gang & Zhong, Ziying, 2022. "Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    • Handle: RePEc:eee:jocaae:v:18:y:2022:i:1:s1815566921000400
    DOI: 10.1016/j.jcae.2021.100282
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    More about this item

    Keywords

    Internal control deficiency; Mandatory disclosure; Accrual quality; Emerging market;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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