Internal Control over Financial Reporting and the Safeguarding of Corporate Resources: Evidence from the Value of Cash Holdings

• Published in: Contemporary accounting research Vol. 33; no. 2; pp. 783 - 814
• Main Authors: Gao, Xinghua, Jia, Yonghong
• Format: Journal Article
• Language: English
• Published: Toronto Blackwell Publishing Ltd 01-06-2016; Canadian Academic Accounting Association
• Subjects: Accounting; Cash; Effects; Financial reporting; Internal controls; Organization theory
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12164

We test whether internal control weaknesses (ICWs) endanger cash resources that manifests in a lower value of cash. Our results indicate that investors value liquid assets in ICW firms substantially less than they do in non‐ICW firms. The negative valuation effect of weak internal control mainly concentrates on ICWs related to the control environment or overall financial reporting process. While firms remediating ICWs reverse the value loss from holding cash, firms whose internal control deteriorates or remains ineffective exhibit a lower value of cash. The marginal effect of ICWs on the value of cash remains significant after controlling for existing governance mechanisms and accounting conservatism, highlighting a unique governance role of internal control in mitigating unresolved agency problems and safeguarding corporate resources.