CEO financial background and internal control weaknesses

Oradi, Javad and Asiaei, Kaveh and Rezaee, Zabihollah (2020) CEO financial background and internal control weaknesses. Corporate Governance: An International Review, 28 (2). pp. 119-140. ISSN 0964-8410

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Official URL: https://doi.org/10.1111/corg.12305

Abstract

Research question/issue: The existing literature documents that the functional expertise of Chief Executive Officers (CEOs) in finance reduces poor performance risk, improves financial reporting quality, and mitigates audit risk. In this study, we examine the association between CEOs' financial background and internal control weaknesses (ICWs). Research findings/insights: Using a sample of Iranian listed companies for the period 2007–2017, we find a significant negative association between CEOs with financial expertise and ICWs. Furthermore, we show that the negative association between CEO financial expertise and ICWs is stronger if the CEO is recruited from inside the firm. Our main results are robust after controlling for the potential selection issue, random effects at the firm level, and the impact of the new Iranian internal control regulations. Moreover, our results remain unchanged after controlling for other CEO characteristics, audit committee characteristics, audit fees, and using an alternative measure of financial expertise. Theoretical/academic implications: Our study contributes to the extant literature by examining the association between CEOs' financial background and ICWs, a theme that remains largely unexplored in previous research. We also extend the literature on CEO succession origin. Practitioner/policy implications: This study has important implications for regulators regarding the improvement of financial reporting quality and the effectiveness of internal controls, especially in the emerging markets. Particularly, our findings may be of benefit to auditors when assessing the risks regarding their clients' material weaknesses, as well as to shareholders and boards of directors when hiring a new CEO. © 2020 John Wiley & Sons Ltd

Item Type: Article
Uncontrolled Keywords: CEOs; corporate governance; financial expertise; internal control weakness; Iran
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Divisions: Faculty of Business and Accountancy
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 25 Aug 2020 04:45
Last Modified: 25 Aug 2020 04:45
URI: http://eprints.um.edu.my/id/eprint/25445

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