The Impact of Occupational Community on the Quality of Internal Control

Senior executives in major corporations have drawn attention in recent years for a range of unethical activities. Despite a rise in measures to protect against such lapses, executives still make decisions whether or not to comply with reporting standards, best practices, industry norms and legislation. The prior literature in this area addresses individual characteristics of decision makers and social networks between executives and boards of directors, but to this point has largely overlooked group dynamics of the executive team. Our study addresses this gap and examines the relationship between an occupational community of top executives and the quality of internal control. We construct a unique measure for the executive occupational community based on CEO and CFO’s joint tenure. Our findings show that the number of years of CEO/CFO’s joint tenure is significantly and negatively associated with internal control weakness, suggesting that the longer the executive relationship, the lower the likelihood of internal control weakness. Our study indicates that the presence of an occupational community contributes to better internal control.