Does Verification of Internal Control Over Financial Reporting Affect Voluntary Disclosure?

We investigate whether auditor verification of internal controls over financial reporting (i.e., ICFR verification) affects a firm’s likelihood of voluntary disclosure and investor’s perception of firm’s voluntary disclosure decisions. We exploit a recent amendment to Smaller Reporting Company Regulatory Relief and Simplification in 2018, which created a group of firms that are subject to ICFR verification but exempt from mandatory disclosure of certain items in their periodic filings. We find these firms maintain greater disclosure of exempt items compared to firms that are not subject to ICFR verification. Furthermore, a difference-in-differences design reveals that investors view ICFR verification as a substitute for the loss of commitment to disclosure. Finally, we find firms that reduce disclosure in response to the exemption are perceived more negatively in the presence of ICFR verification as compared to firms without ICFR verification, consistent with investors viewing non-disclosure under ICFR verification as strategic. Overall, our results underscore the benefits of ICFR verification in building managers’ and investors’ confidence in the production of financial information