Individualism and Internal Control Material Weaknesses around the World

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 2: Auditors and Internal Control Weakness

Abstract

The recent and ongoing scandals surrounding questionable accounting practices and corporate wrongdoing over the past decade have often been attributed to the lack of effective internal controls. We examine the extent to which cultural differences influence internal control material weaknesses (ICMW). Prior research documents considerable evidence supporting the link between ethical beliefs and culture. This relation is particularly evident for the cultural dimension of individualism (Smith and Hume 2005). We hypothesize that individualism is positively related to both the existence of ICMW and the number of ICMW. We also posit a positive relationship between individualism and the propensity to remediate material weaknesses. Using the country-level index for individualism developed by Hofstede (2001), we find evidence consistent with our hypotheses. The existence and number of ICMW as well as the propensity to remediate material weaknesses are higher in cultures with higher levels of individualism.

Authors

• Kiridaran Kanagaretnam, McMaster University

• Gerald Lobo, University of Houston–Downtown

• Jian Zhou, University of Hawaii at Manoa