Board monitoring and internal control system disclosure in different regulatory environments
Journal of Applied Accounting Research
Purpose This paper investigates two research questions: Is 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? Design/methodology/approachWe 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). Findings Our findings support an inverse association between the extent of ICS disclosure and our proxies for board monitoring. We also find a statistically significant negative relationship between board monitoring and substantial ICS disclosure but no relationship between board monitoring and formal ICS disclosure. Our evidence also shows that the regulatory environment moderates the relationship between board monitoring and ICS disclosure by introducing trade-offs among monitoring mechanisms. Research limitations/implications An important caveat of our research is that we do not provide evidence on the way users can make the availability of substantial information on the effective functioning of ICS a useful tool for their monitoring activity. Practical implications We 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). Originality/value We propose a framework for the analysis of ICS disclosure that considers the importance of the content of ICS disclosure, rather than its extent. Through this framework, researchers, practitioners, and standard-setters can separate merely formal, uninformative disclosure (boilerplate information) on the elements of the ICS from substantial disclosure regarding its functioning (monitoring function). We 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.
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Vol. 16, issue 1, pp