Evaluating the credibility of voluntary internal controls certification

This study finds that CEOs’ and CFOs’ voluntary certification of internal controls over financial reports (ICFR) in Australia are associated with higher quality earnings, suggesting that disclosures are credible. The results are robust to two-stage regression analysis, propensity score matching, and alternative measures of earnings quality. We use three-stage regression modeling to address the issue of the joint effects of ICFR and audit fees on accruals quality and the demand effect of corporate governance on audit fees. Using audit fees as a determinant of credible ICFR certification, we find that auditors charge lower fees for firms with good ICFR. Such firms are also associated with better corporate governance. The findings of our study have implications for policymakers, regulators, and capital market participants.