The impact of the weakness of internal control of financial reporting systems for earnings management in Korea's mutual savings banks

Abstract

In this paper, we predict that the weaker the internal control system, the easier the earnings management by savings banks. In this regard, the paper verifies whether savings banks, reporting weakness in their internal control of financial reporting systems, manage their earnings through their discretionary allowance for loan losses. The results show that savings banks with weak internal control systems are significantly more likely to use their discretionary allowance for loan losses. This suggests that the weaker the internal control of financial reporting systems, the more likely the opportunistic earnings management by bank managers. This paper extends the literature on savings banks' earnings management to verify whether the weakness of their internal control of financial reporting systems, which has become an important issue in recent years, impacts their allowances for loan losses and extend financial institution's internal control systems in terms of an accounting approach. ?2015 International Information Institute.