Exploring the Use of Control Rhetoric in CEO Letters : Perceptions of Financial Statement Users

This research explores the use of control rhetoric in CEO letters between the pre and post Sarbanes Oxley periods and examines financial statement users' perception of internal controls and company performance from the CEO letter. We compare the amount of control rhetoric included in CEO letters contained in the annual report in pre- and post-SOX periods and conduct an experiment to determine if the amount of control rhetoric would influence financial statement users' perception of internal controls and opinion of the company. The results indicate that control rhetoric indeed increased after the passage of SOX for organizations overall were most salient in large size companies. In addition, our results indicate that users are affected by the use of control rhetoric in the CEO letter but their assessment of internal controls did not influence their perception of the company performance. This study confirms the organizational emphasis on internal controls and corporate governance after the passage of SOX. It shows that CEOs attempt to project the company's effectiveness of internal controls through the letter to the shareholders more since SOX. Further, the results demonstrate that perceptions of readers of financial statements are affected by the use of control rhetoric in the CEO letter. We recognize utilizing undergraduate students as financial statement users may limit the external validity and generalizability of the study