National Culture and Internal Control Disclosures: A Cross‐country Analysis

Abstract Manuscript Type Empirical Research Question/Issue This study examines the association between national culture and the amount of information on internal controls listed companies disclose in their annual reports. In particular, we argue that culture affects managers' perceptions of the costs and benefits of disclosing information and, consequently, drive managers' disclosure choices. In addition, we investigate whether culture indirectly, via investor protection, determines disclosure decisions. Research Findings/Insights Using unique hand‐collected data from a sample of 4,370 firm‐year observations for 1,559 firms from 29 countries for the period 2005 to 2007, we find that national culture directly affects such disclosures. Moreover, we show that national culture also indirectly affects disclosures via the level of investor protection in a country. Theoretical/Academic Implications This article is the first to examine cultural determinants of internal control disclosures using a framework in which managers' disclosing decisions are determined by the trade‐off between the costs and benefits of disclosing such information. Moreover, we are the first to demonstrate that culture not only directly but also indirectly, via investor protection, influences disclosure choices. Practitioner/Policy Implications This study contributes to the debate on the development and design of corporate governance practices. Accounting scandals and corporate failures in recent years have raised calls for improved internal controls, as well as enhanced reporting about these internal controls. Many of these calls are characterized by the view that there is an optimal way of developing such systems. We show that differences in internal control disclosures are influenced by cultural differences. Therefore, introducing a uniform approach to demanding disclosure of information on internal controls may not necessarily translate into uniform reporting practices.