Government Contracting and Internal Control Over Financial Reporting

• In Event: Corporate Control Systems and Financial Misreporting

Abstract

I investigate whether contracting with the federal government is associated with the likelihood of reporting material weaknesses in internal control over financial reporting. Government contracting has distinct laws, regulations, and monitoring activities not common to commercial contracts. I hypothesize that the government contracting laws, regulations, and monitoring activities create opposing influences on the effectiveness of companies’ internal control over financial reporting because the government contracting setting influences both the existence and detection of internal control problems. I find that government contracting is negatively associated with the likelihood of reporting a material weakness in internal control over financial reporting and that government contracting companies are more likely to remediate a material weakness in the following year. Collectively, these findings suggest that the government contracting setting does influence the effectiveness of internal control over financial reporting.

Author

• Amanda Convery, University of Wisconsin–Madison