The Impact of Weak Internal Controls on the Abnormal Tone of Management Explanatory Reports with an Emphasis on Corporate Financial Misconduct

Subject Areas : Financial and Behavioral Researches in Accounting

Mohammadraza Abbasi Astamal ¹ , Shahin Sadigh Rahmani ² , Amir Ata Alizadeh ³

1 - Assistant Professor, Department of Accounting, Va.C.,Islamic Azad University, Varzaghan, Iran.
2 - MSc ,Department of Accounting,, Seraj Institute of Higher Education, Tabriz, Iran.
3 - MSc, Department of Accounting, Seraj Institute of Higher Education, Tabriz, Iran.

Received: 2025-05-15 Accepted : 2025-06-23 Published : 2025-06-25

Keywords: Weak Internal Controls, Abnormal Tone of Management Commentary, Corporate Financial Misconduct.,

Abstract :

Weakness in internal controls, by creating an environment that reduces transparency and facilitates financial misconduct, leads managers to use ambiguous and unconventional language in their explanatory reports to conceal systematic deficiencies and improper actions. Therefore, the present study aims to examine the impact of internal control weaknesses on the abnormal tone of managers’ explanatory reports, with an emphasis on corporate financial misconduct. This research is classified as applied in terms of its objective. Methodologically, it is descriptive-correlational, and in terms of its nature, it is causal-post-event. The statistical population consists of 128 companies listed on the Tehran Stock Exchange during the period from 2019 to 2023, resulting in a total of 640 observations. To test the research hypotheses, multiple regression analysis using panel data was employed. The findings indicate that weaknesses in internal controls have a positive and significant impact on the abnormal tone of managers’ explanatory reports. However, corporate financial misconduct not only does not have a direct effect on the abnormal tone of these reports, but it also does not influence the relationship between internal control weaknesses and the tone of the explanatory reports. Based on this, it can be concluded that the quality of internal controls plays a crucial role in how managerial reports are written, and its deterioration may lead to increased interpretability in corporate reporting. Therefore, designing and improving internal control mechanisms is essential for enhancing transparency, accountability, and investor trust, thereby strengthening the efficiency of the capital market.

 

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