The Association between Internal Control and Corporate Governance

Abstract

This thesis provides additional evidence on the association between internal control quality and corporate governance. The analyses are based on a sample of U.S. firms with internal control auditing reports from 2004 to 2012. My logistic regression analyses indicate that internal control quality is related to the characteristics of the audit committee, board of directors and CEO. First, I find that the independence of board directors is negatively related to internal control material weaknesses (ICMWs). Large firms tend to have large audit committees and boards of directors, and more female directors on the boards, and are negatively related to ICMWs. Second, I find that compared to Public Company Accounting Oversight Board Auditing Standard No. 2, Auditing Standard No. 5 has no impact on the relationship between internal control quality and the effectiveness of the audit committee and board of directors, except that the positive relationship between independence of audit committee members and ICMWs in the Auditing Standard No. 2 period disappears under Auditing Standard No. 5. Third, I find that companies where the CEO has high ownership or a large portion of cash and bonus compensation have a positive relationship with ICMWs, and that CEO duality and CEO age are negatively associated with ICMWs. However, I fail to find any evidence to support a relationship between corporate governance and the remediation of ICMWs.