This study aims to investigate the relationship between the prior audit experience of Chief Financial Officers (CFOs) and corporate internal control quality, specifically how the professional background enhances their expertise in internal control. This expertise may enhance their effectiveness in overseeing and maintaining robust internal control systems.
Using a sample of Chinese A-share listed firms from 2012 to 2020, this study examines the association between former-auditor CFOs and internal control quality. To ensure the robustness of this study’s conclusion, the authors use a Difference-in-Differences design, propensity score matching, entropy balancing, instrumental variable estimation and alternative fixed-effects specifications.
This study found that CFOs with prior audit experience are associated with improved internal control quality. This association is more pronounced when the CFO has senior-level audit experience, more recent tenure at an accounting firm, prior experience at an international Big 4 or a domestic Top 10 accounting firm or when the firm operates in a highly digitalized environment. Aligned with the COSO Framework (2013), path analysis reveals two key channels: improved risk assessment and strengthened internal supervision. Furthermore, former-auditor CFOs contribute to more reliable financial reporting, greater accounting conservatism and reduced corporate default risk.
These findings expand the literature on the benefits of accounting firm experience and clarify the underlying mechanisms. Additionally, this study provides a plausible explanation for the increasing preference for appointing CFOs with audit experience.
