Internal Control Material Weaknesses and Foreign Corrupt Practices Act Violations

• In Event: Fraud Prevention and Audit 2

Abstract

This study investigates the relationship between internal control quality and the occurrence of Foreign Corrupt Practices Act (FCPA) violations. Specifically, we examine the relation between the presence, the number, and the type of internal control material weaknesses and the occurrence of FCPA violations. Based on a sample of firms that violated FCPA between 2004 and 2011, our results show that firms with internal control material weaknesses are more likely to violate FCPA. In addition, firms with multiple internal control material weaknesses have a high risk of having violated the FCPA than firms with less internal control material weaknesses. Firms with internal control weaknesses related to the risk of assessment, information and communication, and monitoring components of internal controls (based on COSO internal control framework) present a higher risk of FCPA violations than firms without internal control material weaknesses in those areas.

Authors

• Chih-Chen Lee, Northern Illinois University

• Hua-Wei Huang, National Cheng Kung University

• Yi-Hung Lin, National Cheng Kung University

• Meghann Abell Cefaratti, Northern Illinois University