Bridging the Gap: A Study of Government Suppliers’ Reporting Practices

Using 4 million procurement contracts valued at around $1 trillion, we examine the financial reporting quality of government suppliers subject to government scrutiny. We document that government suppliers demonstrate higher-quality financial reporting compared to firms without government contracts. This finding is partly attributable to improvements in firms’ internal controls over financial reporting following contracting with the government. Additionally, we document that procurement contract clauses related to competitive procedures, government monitoring and certification of internal information accuracy positively contribute to the quality of financial reporting. We address potential endogeneity concerns by studying changes in congressional committee leadership and difference-in-differences analyses around first-time and last-time contract awards. Our findings support the political cost hypothesis, highlighting the role of government customers in enhancing the quality of mandatory disclosures and internal controls.