Misstatements and Internal Control over Operations and Compliance

This study examines whether the effectiveness of internal control over operations and compliance is associated with the likelihood of financial misstatements. Using a unique dataset from Taiwan, we find that the more deficiencies a company has in internal control over compliance, the greater the likelihood that the company’s financial statements will be restated in the future; indeed, severe misstatements are more likely for firms with more internal control deficiencies in compliance. However, we do not find a similar impact involving internal control over operations. As the literature contains little about internal control over operations and compliance, our study contributes by shedding light on the importance of control activities in operations and compliance in regard to the quality of financial reporting.