Does Internal Control Quality Matter to Employees?

This study examines the association between ineffective internal control over financial reporting (ICFR) and the employee commitments. We argue that ineffective ICFR reduces the confidence of employee in the employer, leading to negative effects on employee commitment. Using propensity score matching and entropy-balanced to control for endogenous problem, we find that material weaknesses in ICFR are associated with higher employee turnover. We also find that material weaknesses in ICFR are negatively associated with employees’ willingness to hold employer stock.
We show that “tone at the top” material weaknesses primarily drive these findings. Finally, we find that employee turnover decreases, while employees’ willingness to hold employer stock increases when firms have subsequent remediation of material weaknesses. Overall, our study provides new insights that the quality of ICFR matters to employees, which affects employee turnover and employees’ decision to hold employer stock.