Article2013

The Effect of Human Resource Investment in Internal Control on the Disclosure of Internal Control Weaknesses

Jong‐Hag Choi · Sunhwa Choi · Chris E. Hogan · Joonil Lee

74 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

SUMMARY This paper investigates the effect of human resource investment in internal control over financial reporting on the disclosure of internal control weaknesses at both the firm and the individual department level. Using a unique reporting requirement for Korean-listed firms, this study uses the ratio of the number of employees involved with the implementation of internal controls (hereafter, IC personnel) to the total number of employees of the firm as a proxy for a firm's human resource investment in internal control. We find that the proportion of IC personnel and the change of the proportion within the firm and several key departments are negatively associated with the disclosure of internal control weaknesses. We also find that a change in IC personnel is positively associated with the likelihood of remediation of the internal control weaknesses. These findings provide valuable insights into the role of human resource investment in determining the strength of a firm's internal controls over financial reporting.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1997Legal Determinants of External Finance 2007Determinants of weaknesses in internal control over financial reporting 2007Accruals Quality and Internal Control over Financial Reporting 2010Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research 2005Audit Committee Quality and Internal Control: An Empirical Analysis 2008The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality

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