*The Impact of Culture on Internal Control Weaknesses: Evidence from Firms that Cross-List in the U.S.

• In Event: Culture and Institutional Influences

Abstract

This study addresses how culture impacts the likelihood of reporting material weaknesses in internal controls for firms that cross-list in the U.S. Based on the theoretical cultural dimensions developed by Hofstede (1983, 2001), we explore whether the country-level variables of power distance, individualism/collectivism, uncertainty avoidance, masculinity/femininity, and long-term/short-term orientation explain the likelihood of deficiencies in the reporting effects of these foreign firms with material weaknesses in internal controls. Due to Section 404 of the SOX Act, foreign issuers are no longer exempt from U.S. corporate governance listings by the SEC in regards to exchange requirements. Foreign firms are expected to adhere to U.S. provisions where mandated disclosure of material internal controls over financial reporting (ICOFR) is required by managers and external auditors. Our results show that the cultural dimensions of power distance and masculinity are positively related to a firm’s propensity to report material weaknesses in internal controls.

Authors

• Maria T Caban-Garcia, University of South Florida, St Petersburg

• Carmen Belen Rios-Figueroa, University of Puerto Rico-Rio Piedras

• Karin Ann Petruska, Youngstown State University