Effectiveness of Internal Controls on Disclosure in the Text of Financial Statements

Risk disclosure is important. The study of factors affecting risk disclosure and the effect of risk disclosure on firm performance in the risk disclosure literature has been considered. Effective internal controls can drive the level of risk disclosure in the text of financial statements. This issue has been considered in this research. To answer the research question on how the effectiveness of internal controls affects risk disclosure, the data of 114 companies listed on the Tehran Stock Exchange were analyzed. The findings show that companies with weak internal control systems report lower levels of textual risk disclosure than companies with effective internal controls. The results also show that the periodic repetition of the weakness of internal controls and its public dissemination leads to the disclosure of a higher level of risk by managers. Based on the research findings, it can be concluded that auditors' attention to the internal controls weakness and strengthening the structure of internal controls of the company can improve further risk disclosure. Overall, the results of the research fill the existing research gap in the field of the importance of disclosing internal control weaknesses and the usefulness of the independent auditor's attention to the effectiveness of internal controls and managing risk-based textual disclosure.