Contemporary Accounting Research 2026
Intense Scrutiny of ICFR and Regulatory Compliance: Evidence From FDA ‐Regulated Firms
Abstract
Mandatory audits of internal controls over financial reporting (ICFR), intended to strengthen financial reporting processes, may also have implications for broader organizational compliance systems. Increased scrutiny of financial controls could either enhance overall control quality, yielding benefits for nonfinancial controls, or induce firms to reallocate resources away from those areas. We exploit quasi‐exogenous variation in financial control scrutiny arising from (1) the initial implementation of ICFR audits, (2) the subsequent relaxation of ICFR auditing standards, and (3) the introduction of management assessments of financial controls absent concurrent ICFR audits, to examine how changes in external scrutiny affect Food and Drug Administration (FDA) inspection findings, an important form of regulatory noncompliance with direct public health implications. Our results show that the introduction of ICFR audits is associated with a reduction in FDA inspection findings; however, these benefits reverse when ICFR audit scrutiny declines. Mechanism analyses suggest that remediation of control deficiencies, investments in information systems, and expanded internal audit functions facilitate spillovers to compliance controls. Importantly, we find limited evidence that management assessments alone, without concurrent ICFR audits, generate similar spillover effects. Overall, our findings suggest that internal control systems operate as integrated organizational processes rather than isolated financial reporting mechanisms and that external scrutiny plays a critical role in enabling spillovers across control domains. These insights have implications for audit committees, auditors, regulators, and other stakeholders.
- DOI
- 10.1111/1911-3846.70076
- Language
- en
- Sources
- crossref openalex