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The Impact of Occupational Community on the Quality of Internal Control

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Abstract

Senior executives in major corporations have drawn attention in recent years for a range of unethical activities. Despite a rise in measures to protect against such lapses, executives still make decisions whether or not to comply with reporting standards, best practices, industry norms and legislation. The prior literature in this area addresses individual characteristics of decision makers and social networks between executives and boards of directors, but to this point has largely overlooked group dynamics of the executive team. Our study addresses this gap and examines the relationship between an occupational community of top executives and the quality of internal control. We construct a unique measure for the executive occupational community based on CEO and CFO’s joint tenure. Our findings show that the number of years of CEO/CFO’s joint tenure is significantly and negatively associated with internal control weakness, suggesting that the longer the executive relationship, the lower the likelihood of internal control weakness. Our study indicates that the presence of an occupational community contributes to better internal control.

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Notes

  1. We look to occupational community rather than to a specific profession such as accounting for a number of reasons. Not all executives are members of one or more professional bodies. They do not share a common requirement for certification in the same way that medical doctors do, for instance, although some research has indicated that members of the accounting profession see a professional designation as the route to a senior management position (Anderson-Gough et al. 2002). Similarly, CEOs and CFOs do not necessarily share a common professional accreditation. Furthermore, corporate executives who are also members of professional bodies may have less in common with junior ranks of that professional body than they do with peers in similar positions, and with their colleagues inside their employing organization.

  2. Jiang et al. (2010) find that in contrast to CEOs, CFOs’ equity incentives play a more important role in the extent of earning management as measured by discretional accruals and the likelihood of beating analyst forecasts. Their evidence suggests that CFO’s incentives package plays an additional and independent role in earning management and their decisions are not solely driven by CEO’s pressure.

  3. The universe of the Execucomp database contains over 2800 active and inactive companies. Execucomp has data back to 1992 but mostly for the S&P 500. The key group is S&P 1500 plus companies where some firms may no longer list on U.S. stock exchanges or they are removed from the S&P 1500 index but still remain trading.

  4. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_12_ind_port.html.

  5. Several studies also include both SOX 302 and 404 disclosures. For example, Klamm et al. (2012) use Audit Analytics database during the period of 2004–2009 and identify about 8.8 % of the observations with SOX 404 ICW among 20,318 of total observations. Doyle et al. (2007) searched SOX 302 and 404 disclosures in the Compliance Week during the period of November 2003 and August 2005. After combining the data with Compustat, they show that about 13.4 % of their sample firms have SOX 302 or SOX404 ICW.

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Acknowledgement

The authors would like to thank the editor and anonymous reviewer for their helpful comments on an earlier draft of the paper.

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Authors and Affiliations

  1. Faculty of Business Administration, University of Regina, 3737 Wascana Parkway, Regina, SK, S4S 0A2, Canada

    Shelagh Campbell & Zhou Zhang

  2. Lixin Accounting Research Institute, Shanghai Lixin University of Commerce, Shanghai, 201620, China

    Yingqi Li & Junli Yu

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  1. Shelagh Campbell
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  2. Yingqi Li
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  4. Zhou Zhang
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Correspondence to Yingqi Li.

Appendix 1

Appendix 1

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Table 6 Variable definitions
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Campbell, S., Li, Y., Yu, J. et al. The Impact of Occupational Community on the Quality of Internal Control. J Bus Ethics 139, 271–285 (2016). https://doi.org/10.1007/s10551-015-2624-2

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