The purpose of this paper is to investigate two research questions. Is internal control system (ICS) disclosure, as a monitoring mechanism, associated with the characteristics of the board of directors, particularly the audit committee as the main board committee devoted to the effectiveness of ICS? Does the regulatory environment, particularly the regulation on ICS disclosure as an external governance/monitoring mechanism play a role in shaping the relationship between board monitoring and ICS disclosure and, if so, how?
The authors study the ICS disclosure of 149 companies listed in four European financial markets (London, Paris, Frankfurt and Milan), each with its own regulations about ICS disclosure, during a six-year period (2003-2008).
The findings support an inverse association between the extent of ICS disclosure and the proxies for board monitoring. The authors also find a statistically significant negative relationship between board monitoring and substantial ICS disclosure but no relationship between board monitoring and formal ICS disclosure. The evidence also shows that the regulatory environment moderates the relationship between board monitoring and ICS disclosure by introducing trade-offs among monitoring mechanisms.
An important caveat of the research is that it does not explore if and how investors use ICS disclosure to evaluate the firm.
The authors propose a framework for the analysis of ICS disclosure that overcomes limitations of previous literature that has neglected the importance of the content beyond the extent of ICS disclosure. Through this framework researchers, practitioners and standard setters are able to separate merely descriptive, formal un-useful disclosure (boilerplate information) on the composing elements of the ICS from substantial disclosure regarding the functioning of the ICS (monitoring function).
The authors also provide evidence that the relationship between board monitoring and ICS disclosure varies with the content of the information communicated, thus offering guidance for future research not to focus on measuring the extent or quantity of disclosure but on the variety and complexity of the information communicated.
This research was conducted when Saverio Bozzolan was at the University of Padova. The authors gratefully acknowledge the comments and suggestions provided by the two anonymous referees, Chris Mallin, Antonio Parbonetti, Philip Shrives, Elisabetta Ipino and all participants to the workshops at the University of Naples and at the University of Birmingham, to the 33rd European Accounting Association Congress (Instabul), and the second European Risk Conference (Milan). The Authors thank Serena Marcato and Luca Simonetto for their valuable research assistance. Saverio Bozzolan and Giovanna Michelon gratefully acknowledge financial support received from the University of Padova (Project CPDA068143/06 “Risk Management and Internal Control Systems: assessment of the adequacy and disclosure to the financial market”).
Michelon, G., Bozzolan, S. and Beretta, S. (2015), "Board monitoring and internal control system disclosure in different regulatory environments", Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 138-164. https://doi.org/10.1108/JAAR-03-2012-0018Download as .RIS
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