CEO Traits and Internal Control Deficiency Probability: Evidence from CEO Risk Conservatism and Organizational Identification

Abstract

Internal control embeds rules and monitoring procedures into business processes to alleviate agency conflicts and correct information biases, forming a key mechanism that safeguards the credibility of financial reporting, compliance enforcement, and risk management capacity. Using issuance review (IPO review) information, this study builds an internal control deficiency prediction model and proposes the model-generated probability of internal control deficiency (IC_PROB) as a continuous measure to capture firm-level latent internal control failure risk. The empirical analysis yields three main findings. First, CEO risk conservatism is significantly negatively associated with IC_PROB, indicating that a more conservative risk orientation reduces risk exposure and strengthens compliance enforcement. Second, CEO organizational identification is significantly positively associated with IC_PROB, suggesting that, under performance pressure and financially oriented incentives, stronger organizational identification may raise tolerance for unethical pro-organizational behavior, thereby increasing the probability of internal control deficiencies. Third, CEO individual attributes play a substantive role: educational attainment and a finance/accounting background are both negatively related to IC_PROB. By jointly examining individual and organizational dimensions, the study identifies mechanisms underlying internal control effectiveness and offers both theoretical and practical implications.