The Benefits of Disclosing Internal Control Weaknesses: Evidence from Taiwanese Banks

This study uses financial data from banks in Taiwan from 2001 to 2014 to examine the benefits of reporting internal control weaknesses (ICWs). The study argues that reporting non-zero ICWs reveals the high effort undertaken by a firm in assessing its internal control effectiveness and that such effort may be positively valued by the market. The results indicate a strong positive correlation between disclosing non-zero ICWs and market value of equity after controlling endogeneity problems. The results are robust with respect to the additional tests, which include adding other proxies for internal audit quality and considering the effect of mergers and acquisitions. This study is innovative in documenting evidence of the benefits of disclosing ICWs. It contributes to research in this field by supporting regulator's disclosure requirements and encouraging managers to diligently report ICWs.