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How does internal control regulation affect financial reporting?

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  • Altamuro, Jennifer
  • Beatty, Anne

Abstract

Internal control regulation effectiveness remains controversial given the recent financial crisis. To address this issue we examine the financial reporting effects of the Federal Depository Insurance Corporation Improvement Act (FDICIA) internal control provisions. Exemptions from these provisions for banks with assets under $500 million and for non-US banks provides two unaffected control samples. Our difference-in-differences method suggests that FDICIA-mandated internal control requirements increased loan-loss provision validity, earnings persistence and cash-flow predictability and reduced benchmark-beating and accounting conservatism for affected versus unaffected banks. More pronounced effects in interim versus fourth quarters suggest that greater auditor presence substitutes for internal control regulation.

Suggested Citation

  • Altamuro, Jennifer & Beatty, Anne, 2010. "How does internal control regulation affect financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 58-74, February.
  • Handle: RePEc:eee:jaecon:v:49:y:2010:i:1-2:p:58-74
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    References listed on IDEAS

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    3. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
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    6. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    7. John C. Coates IV, 2007. "The Goals and Promise of the Sarbanes-Oxley Act," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 91-116, Winter.
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