The Effect of Internal Control Regulation on Earnings Quality: Evidence from Germany and Implications for SOX 302 and 404


Christiane Strohm
Christiane Strohm
  • Speaker
Faculty of Economics, University of M√ľnster

Event Information

Type
Research Seminar
Programme
Accounting
Date
Mon. 12 Mar. 2007
Contact
Time
16:00-17:30 hours
E-mail
Location
Mandeville Building T3-42
Number


Abstract

This study examines the association between internal control regulation and earnings quality with specific focus on the German context. Whereas mandatory internal control requirements were introduced in the US in 2002 (SOX 302 and 404), mandatory requirements have been in place in Germany since 1998 (KTG). Hence, the German setting provides a relatively long post-regulation period over which to study the effect of internal control regulation on earnings quality. Most importantly, in contrast to the US, the German regulation defines internal controls beyond the reliability of financial reporting as well as provides a clearer and more binding framework for the monitoring and audit of internal control systems. Using a difference-in-differences approach over the period 1994 - 2002 with US firms as our control group, we investigate whether internal control regulation leads to an improvement in several measures of earnings quality. We find that, in the post-regulation period (1998 - 2002), German firms relative to our control group experience an increase in timely loss recognition, earnings persistence and predictability, and a decrease in earnings smoothing. These findings are robust to the use of alternative specifications and the inclusion of additional controls. Taken together, our results are consistent with the achievement of one of the main goals of internal control regulation—increased earnings quality through efficient and effective internal controls.
 
Contact information:
Paolo Perego
Email
Anna Nöteberg
Email

Anna Gold
Anna Gold
  • Coordinator
Paolo Perego
Associate Professor in Management Accounting & Control
  • Coordinator