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Characteristics Of Firms With Material Weaknesses In Internal Control
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Book Synopsis Characteristics of Firms with Material Weaknesses in Internal Control by : Stephen H. Bryan
Download or read book Characteristics of Firms with Material Weaknesses in Internal Control written by Stephen H. Bryan and published by . This book was released on 2005 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The legislation known as Sarbanes Oxley (SOX) requires firms to assess their internal controls over financial reporting and to report material weaknesses, as defined by the Public Accounting Oversight Board. Based upon early evidence, we find that firms with material weaknesses are, on average, both smaller and worse performers than their matched industry counterparts. We also find that firms with material weaknesses, on average, have higher betas, suggesting a higher discount by the market for these firms. From a macro-economic view, the total market value of firms with reported material weaknesses is only 1.28% of the market value of the S&P 500 firms. Finally, although we document negative stock returns on the date of the announcement of the material weakness, over a narrow interval, the returns are insignificant. Identifying small firms that collectively constitute a minor portion of the economy at a very high cost to all public firms seems out of balance. Whether SOX will yield benefits to corporations through better operations, reduced cost of capital, or other means remains to be seen. Moreover, if these benefits materialize, whether they should, in effect, be legislated is a matter of debate. Although some maintain that SOX will reduce earnings management, firms continue to manage earnings through pro forma earnings. Furthermore, although the SEC's Reg G, also enacted as part of SOX legislation, makes the "managed disclosure system" through pro forma earnings more transparent, it fails to exercise control over the reconciliation process that firms use both to set and to meet analyst earnings estimates.
Book Synopsis Foreign Firms' Mandatory Reporting of Material Weaknesses in Internal Control by : Maria T. Caban-Garcia
Download or read book Foreign Firms' Mandatory Reporting of Material Weaknesses in Internal Control written by Maria T. Caban-Garcia and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The enactment of the Sarbanes-Oxley Act (SOX) of 2002 established several reforms to improve corporate governance and financial reporting practices for companies listed in US capital markets. Given the important role played by foreign firms in US capital markets, the present article discusses the early effects of SOX's regulation on foreign firms. Country- and firm-level data provide a descriptive analysis of the characteristics and trends in material weakness in internal controls reporting for firms cross-listed on US exchanges. The discussion includes a description of the implementation timeline of Section 404 for foreign issuers and compares some of these characteristics to reports from US firms. Understanding the characteristics of cross-listed firms, as well as country-specific qualities, is important to auditors and managers as they strive to maintain audit quality and improve internal control practices and corporate governance. This information is beneficial to regulators as these characteristics could have implications in the evaluation of foreign firms' compliance with Section 404 requirements.
Book Synopsis Internal Control Weakness and Cost of Equity by : Maria Ogneva
Download or read book Internal Control Weakness and Cost of Equity written by Maria Ogneva and published by . This book was released on 2012 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Section 404 of the Sarbanes-Oxley Act (SOX) requires every company to report on the effectiveness of internal controls over financial reporting. Section 404 has arguably been the most controversial provision of SOX, with many registrants complaining that the high cost of compliance outweighs its benefits. In contrast, the SEC and others have argued that the Section 404 provisions are beneficial to the capital markets and will eventually reduce the cost of capital. In this paper, we examine the association between implied cost of equity and internal control effectiveness for firms that filed Section 404 reports with the SEC. We find marginally higher cost of equity for firms disclosing material weakness in internal controls than for a sample of firms disclosing no material weaknesses. The differences in cost of equity disappear after controlling for firm characteristics associated with firms disclosing material weaknesses. Overall, our results are consistent with internal control weakness identified under Section 404 not being directly associated, on average, with higher implied cost of equity.
Book Synopsis How to Comply with Sarbanes-Oxley Section 404 by : Michael J. Ramos
Download or read book How to Comply with Sarbanes-Oxley Section 404 written by Michael J. Ramos and published by John Wiley & Sons. This book was released on 2004-03-29 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: Designed specifically for Sarbanes-Oxley Section 404 compliance, How to Comply with Sarbanes-Oxley Section 404 features: A step-by-step approach to engagement performance Original material from a leading expert in auditing and accounting Practice aids, including forms, checklists, illustrations, diagrams, and tables In-depth explanations to help professionals understand how best to approach the internal control engagement Examples and action plans providing blueprints for implementing requirements of the Act Order your copy today!
Book Synopsis Business Strategy, Internal Control Over Financial Reporting, and Audit Reporting Quality by : Kathleen A. Bentley-Goode
Download or read book Business Strategy, Internal Control Over Financial Reporting, and Audit Reporting Quality written by Kathleen A. Bentley-Goode and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether a company's business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and auditors' internal control reporting quality. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors' internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies' internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients.
Book Synopsis Material Weaknesses in Internal Control Over Compliance for Federal Grants to U.S. Counties by : Julie Christine Hyde
Download or read book Material Weaknesses in Internal Control Over Compliance for Federal Grants to U.S. Counties written by Julie Christine Hyde and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Audits of internal control over compliance in accordance with the Office of Management and Budget Circular A-133 indicate the presence of material weaknesses. These weaknesses highlight breakdowns in internal control and create the opportunity for financial mismanagement and fraud. This study evaluates material weaknesses in internal control over compliance for U.S. counties. Material weaknesses are mapped into internal control elements, and the study examines both entity determinants and auditor characteristics associated with the reporting of material weaknesses. This three-paper dissertation contributes to the existing literature by shedding new light on material weaknesses reported during audits of federal grants. The first paper classifies material weaknesses in internal control over compliance into the five components of the Committee of Sponsoring Organization’s (COSO) internal control framework and by the 14 compliance requirements listed in Circular A-133. The second study investigates determinants of material weaknesses using the following county characteristics: size, financial health, complexity, and the presence of a material weakness in the financial statements. The third paper examines associations with the following auditor characteristics: PCAOB firm registration, voluntary membership with the AICPA’s Governmental Audit Quality Center, the disclosure of a material weakness on the related financial statements, and initial-year auditors. Results indicate that the majority of material weaknesses are classified as control activities. Empirical results indicate that financially weak, complex counties as well as counties with material weaknesses in financial statements are more likely to report material weaknesses in compliance. In addition, auditors who report material weaknesses in county financial statements are likely to report material weaknesses in internal control over compliance and are more likely to be first-year auditors.The results of this study can benefit county managers, grantor agencies, and auditors as they review and evaluate the ability of current internal control systems to prevent and detect material errors or fraud. The results could also influence counties’ auditor selection decisions and stimulate discussions for oversight agencies to encourage auditor rotations. .
Book Synopsis The Sarbanes-Oxley Act by : Michael F. Holt
Download or read book The Sarbanes-Oxley Act written by Michael F. Holt and published by Butterworth-Heinemann. This book was released on 2007-11-16 with total page 219 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Sarbannes-Oxley Act (SOX) is a mandatory requirement for all listed corporations in the US, whether foreign or not. Compliance is not an option. Other countries are developing similar legislation so the books value is international in scope. SOX is a hot topic and the effects are just beginning to be felt world-wide. This new book goes beyond the implementation phase of SOX and looks at the reaction to the Act in terms of costs, benefits and business impacts. This book is for Senior Managers in the Business and Financial/Accounting Communities who want/need to know what the reaction of business and government is to the SOX legislation, what it is costing and how the effects are penetrating through the business environment. Mike Holt presents a comprehensive review of the impact that Sarbanes-Oxley legislation has had on business, the financial community, governments and the public since its inception in 2002. The Sarbanes-Oxley Act has been somewhat successful, but not completely and the cost (well over a trillion dollars) might be considered too high a price to pay for the gains. This book takes a hard look at the costs, benefits and other impacts as well as at what influential and prominent financial, government and business leaders think about it now. * International in scope and content and including interviews with prominent business leaders, CEOs and CFOs of large and small corporations. * Compliance with The Sarbanes-Oxley Act is now mandatory for every listed US corporation and overseas corporations listed on US stock markets. * Covers the reaction of business and government to this legislation, what it is costing and how the effects are penetrating through the business environment.
Book Synopsis Business Strategy and Internal Control Over Financial Reporting by : Kathleen A. Bentley-Goode
Download or read book Business Strategy and Internal Control Over Financial Reporting written by Kathleen A. Bentley-Goode and published by . This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether a company's business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and the quality of auditors' attestation reports concerning ICFR. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors' internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies' internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients.
Book Synopsis Complex Fair Value Measurements and Material Weaknesses by : Nathan H. Cannon
Download or read book Complex Fair Value Measurements and Material Weaknesses written by Nathan H. Cannon and published by . This book was released on 2014 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: U.S. and international regulators and standard setters have criticized companies and audit firms for failing to establish and audit internal controls for complex fair value measurements (FVMs). In this study, we examine the association between FVMs and the likelihood of reporting a material control weakness, as well as settings in which this association may be reduced. We find that companies with FVM portfolios concentrated in Level 2 and Level 3 FVMs are more likely to report material weaknesses, confirming regulators' concerns that the FVMs are associated with lower financial reporting quality. However, we do not find this association for large companies, clients of audit firm industry experts, or clients of audit firms with FVM-specific expertise. These results suggest that despite the inherent complexity of Level 2 and Level 3 FVMs, company- and auditor-specific characteristics can impact companies' abilities to create an effective internal control structure around some FVMs.
Book Synopsis Material Weakness in Internal Control and Stock Price Crash Risk by : Jie Zhou
Download or read book Material Weakness in Internal Control and Stock Price Crash Risk written by Jie Zhou and published by . This book was released on 2013 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the hitherto unexplored questions of whether and how a material weakness in internal control over financial reporting (ICW) and its disclosure influence the occurrence of extreme negative outliers in stock return distributions, which we refer to as stock price crash risk. We predict and find that firms with ICW problems are more crash-prone than firms with effective internal controls. We also find that stock price crash risk is even greater for fraud-related ICWs and revenue/cost of goods sold-related ICWs. The positive impact of ICW on crash risk is observed at least two years prior to the initial disclosure of the adverse opinion on internal control quality, but gradually decreases over the two-year period after the initial disclosure and essentially disappears subsequent to the remediation of publicly disclosed ICW problems. The above results hold even after controlling for various firm-specific characteristics that are known to influence crash risk and ICWs. Overall, our results suggest that the presence of ICWs tends to facilitate managers' bad news hoarding, which eventually increases stock price crash risk. On the other hand, public disclosure of ICWs constrains managerial incentive and ability to withhold bad news from outside investors, thereby mitigating stock price crash risk.
Book Synopsis The Failure to Remediate Previously-Disclosed Material Weaknesses in Internal Controls by : Jacqueline S. Hammersley
Download or read book The Failure to Remediate Previously-Disclosed Material Weaknesses in Internal Controls written by Jacqueline S. Hammersley and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study a sample of companies that fail to remediate previously-disclosed material weaknesses (MWs) in their internal control systems and thus disclose the same MWs in two consecutive annual reports. Their failure to remediate is surprising given that regulators, credit rating agencies, and academics contend that the remediation of MWs is important. We form a control sample of companies that initially disclosed MWs in their internal control systems but subsequently remediated these weaknesses, and investigate the characteristics of the remediated and unremediated MWs, the characteristics of remediating versus non-remediating companies, and the consequences to non-remediating companies. Regarding the characteristics of companies failing to remediate, we find that companies are less likely to remediate previously-disclosed MWs when the weaknesses are more pervasive (i.e., when they are described as at the entity level, when there are more individual weaknesses) and when their operations are more complex (i.e., they have more segments and have foreign operations). In addition, companies with smaller audit committees are less likely to remediate. Regarding the consequences, we find that companies failing to remediate MWs experience larger increases in audit fees and a higher likelihood of auditor resignation as the number of MWs increases. We also find that non-remediating companies are more likely to receive modified audit opinions and going concern opinions. Finally, we find that companies failing to remediate are more likely to miss filing deadlines and experience increased cost of debt capital (i.e., they receive poorer credit ratings when entity level MWs are present and are charged higher interest rates).
Book Synopsis Accruals Quality and Internal Control Over Financial Reporting by : Jeffrey T. Doyle
Download or read book Accruals Quality and Internal Control Over Financial Reporting written by Jeffrey T. Doyle and published by . This book was released on 2010 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relation between accruals quality and internal controls using 705 firms that disclosed at least one material weakness from August 2002 to November 2005 and find that weaknesses are generally associated with poorly estimated accruals that are not realized as cash flows. Further, we find that this relation between weak internal controls and lower accruals quality is driven by weakness disclosures that relate to overall company-level controls, which may be more difficult to quot;audit around.quot; We find no such relation for more auditable, account-specific weaknesses. We find similar results using four additional measures of accruals quality: discretionary accruals, average accruals quality, historical accounting restatements, and earnings persistence. Our results are robust to the inclusion of firm characteristics that proxy for difficulty in accrual estimation, known determinants of material weaknesses, and corrections for self-selection bias.
Book Synopsis Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses Under Section 302 of the Sarbanes Oxley Act of 2002 by : Jacqueline S. Hammersley
Download or read book Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses Under Section 302 of the Sarbanes Oxley Act of 2002 written by Jacqueline S. Hammersley and published by . This book was released on 2007 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: Under Section 302 of the Sarbanes Oxley Act, officers must evaluate the effectiveness of internal controls quarterly. We examine the stock price reaction to management's disclosure of internal control weaknesses and to their characteristics, controlling for other material announcements are made during the event window. We find evidence suggesting that some characteristics of the internal control weaknesses - their severity, management's conclusion regarding the effectiveness of the controls, their auditability, and how vague the disclosures are - are informative. In subsequent analyses, we find that the relation between returns and auditability holds for significant deficiencies and control deficiencies as well as for material weaknesses. However, the relation between returns and how vague the disclosure is is driven by the observations with material weaknesses. This suggests that the information content of internal control weakness disclosures depends on the severity of the internal control weakness.
Book Synopsis Evidence from the U.S. on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting by : Jean C. Bedard
Download or read book Evidence from the U.S. on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting written by Jean C. Bedard and published by . This book was released on 2012 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Securities regulators around the world are considering the costs and benefits of alternative policies for providing information to financial markets on corporate internal control. These policy options differ on the level of auditor involvement, among other dimensions. We examine the association of relative auditor involvement and auditor characteristics with Section 302 internal control disclosures made by US non-accelerated filers from 2003-2005. We find more material weaknesses disclosed in the fourth quarter, when there is relatively more auditor involvement, relative to the first three quarters. Clients of larger audit firms have higher disclosure rates (although they are likely less risky due to more stringent client acceptance standards), but this difference is due to fourth quarter disclosures. Audit firms with Section 404 experience also have greater material weakness disclosure, implying process improvement associated with knowledge sharing across engagements. Collectively, our results shed light on ways to increase the effectiveness of internal control regulation.
Book Synopsis Complying with Sarbanes-Oxley Section 404 by : Lynford Graham
Download or read book Complying with Sarbanes-Oxley Section 404 written by Lynford Graham and published by John Wiley & Sons. This book was released on 2010-03-16 with total page 317 pages. Available in PDF, EPUB and Kindle. Book excerpt: A step-by-step approach for planning and performing an assessment of internal controls Filled with specific guidance for small-business compliance to SEC and PCAOB requirements relating to Sarbanes-Oxley 404, Complying with Sarbanes-Oxley Section 404: A Guide for Small Publicly Held Companies provides you with specific guidance on working with auditors to achieve benefits and cost reductions. This practical guide helps you knowledgeably interpret and conform to Sarbanes-Oxley 404 compliance and features: Clear, jargon-free coverage of the Sarbanes-Oxley Act and how it affects you Links to current guidance online Specific guidance to companies on how to work with auditors to achieve benefits and cost reductions Coverage of IT and IT general controls Examples and action plans providing blueprints for implementing requirements of the act Easy-to-understand coverage of the requirements of the SEC and PCAOB Discussion of the requirements for assessing internal control effectiveness A look at how the new guidance will reduce your costs In-depth explanations to help professionals understand how best to approach the internal control engagement Practice aids, including forms, checklists, illustrations, diagrams, and tables Continuing to evolve and bring about business and cultural change, this area of auditing and corporate governance is demystified in Complying with Sarbanes-Oxley Section 404: A Guide for Small Publicly Held Companies, your must-have, must-own guide to SOX 404 implementation and an effective tool and reference guide for every corporate manager.
Book Synopsis The Association Between Internal Control Material Weakness and Real Earnings Manipulation by : Isaac Bonaparte
Download or read book The Association Between Internal Control Material Weakness and Real Earnings Manipulation written by Isaac Bonaparte and published by . This book was released on 2013 with total page 172 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines the association between internal control material weakness under Section 404 of the Sarbanes-Oxley Act of 2002 and real earnings manipulation. The results indicate that manufacturing firms reporting material weaknesses in internal control grant excessive price discounts to temporarily increase sales. They also overproduce to reduce the cost of goods sold, and reduce their discretionary expenses to enhance reported earnings. Another result that emerges from this study is that manufacturing firms in litigious industries are less likely to engage in real earnings manipulation. Segregating the sample into remediating and non-remediating firms, the results suggest that real earnings manipulation significantly attenuates when firms remediate their internal control material weaknesses. Furthermore, there is no significant difference in real earnings manipulation between firms with contained internal control material weaknesses and those with pervasive internal control material weaknesses.-- Abstract.
Book Synopsis Internal Control Effectiveness and the Associated Characteristics of U.S. Listed Chinese Firms by : Raymond Reed Baker
Download or read book Internal Control Effectiveness and the Associated Characteristics of U.S. Listed Chinese Firms written by Raymond Reed Baker and published by Open Dissertation Press. This book was released on 2017-01-26 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation, "Internal Control Effectiveness and the Associated Characteristics of U.S. Listed Chinese Firms" by Raymond Reed, Baker, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: A recent and rapid increase in U.S. listed Chinese firms has occurred since the 1990's, with at least 495 firms attempting to raise capital on U.S. listing boards. This means of fundraising has allowed investors to participate in the opportunities provided by China's growth, while enjoying the perceived benefits of the U.S. regulatory oversight. One such regulatory requirement is compliance with the provisions of the Sarbanes Oxley Act of 2002, which is largely focused on the internal controls of publically listed firms. This study examines the internal control effectiveness and associated characteristics of 198 U.S. listed Chinese firms, for the fiscal year 2009. With the use of Sarbanes Oxley Section 302 data, this study provides support for a number of previous studies and contributes new findings to the academic literature relating to audit committee financial expertise and CEO duality. This study also provides interesting findings regarding the impact of regulatory environments, when the sample listing type is divided into direct listed firms and cross listed firms. Specifically, this study finds that with U.S. listed Chinese firms, higher percentages of audit committee accounting, supervisor and user financial expertise are positively associated with internal control effectiveness. This study next finds that for direct listed firms, only higher percentages of audit committee accounting and user financial expertise are positively associated with internal control effectiveness. Finally, this study finds that for direct listed firms, CEO duality is negatively associated with internal control effectiveness. DOI: 10.5353/th_b4786943 Subjects: Business enterprises - China - Accounting
