Corporate Reputation and Internal Control Quality: Evidence from Fortune 1000 Companies

This paper examines the association between company reputation and internal control quality. The prior literature suggests that reputation concerns reduce the range of risky choices by management. Building on this idea, we propose that reputation concerns drive high-reputation firms to uphold strong internal control quality, leading to lower internal control risk as reflected by fewer material weaknesses in their internal controls. By analyzing Fortune 1000 companies, our study finds that high-reputation companies are motivated to safeguard their reputation, driven by their need to signal strong performance and by the monitoring pressure from high-quality auditors. As a result, these high-reputation companies are less likely to have internal control material weaknesses, reflecting lower internal control risk and higher internal control quality. Our study enhances the understanding of the role company reputation plays in corporate behavior and decision-making processes.