Real Earnings Management before and after Reporting SOX 404 Material Weaknesses

2015 ◽  
Vol 30 (1) ◽  
pp. 119-141 ◽  
Author(s):  
Tuukka Järvinen ◽  
Emma-Riikka Myllymäki
Keyword(s):  
Earnings Management ◽  
Internal Control ◽  
Internal Controls ◽  
Real Earnings Management ◽  
Public Disclosure ◽  
High Quality ◽  
The Public ◽  
Material Weaknesses ◽  
Internal Control System ◽  
Before And After

SYNOPSIS The purpose of this study is to investigate whether SOX Section 404 material weaknesses manifest in real earnings management behavior. The empirical findings indicate that, compared to companies with effective internal controls, companies with existing material weaknesses in their internal controls engage in more manipulation of real activities (particularly inventory overproduction). This implies that the weak commitment by management to provide effective internal control system and high-quality financial information relates to a tendency to use real earnings management methods. Moreover, we find evidence suggesting that companies employ real earnings management (overproduction and reduction of discretionary expenses) after disclosing previous year's material weaknesses. We conjecture that the public disclosure of material weaknesses induces management to strive to mitigate the expected negative reactions of stakeholders to the disclosure by engaging in real earnings management, which is not easily detected or constrained by outsiders. Overall, this study suggests that material weaknesses in internal controls signal an environment where management is more inclined to employ real earnings management.

Does Audit Quality Influence the Relation between Earnings Management and Internal Control Weakness in the Post –SOX Period

2013 ◽  
Vol 2 (2) ◽  
pp. 70-100
Author(s):  
Judith van Ravenstein ◽  
Georgios Georgakopoulos ◽  
Petros Kalantonis ◽  
Panagiotis Kaldis
Keyword(s):  
Earnings Management ◽  
Internal Control ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Internal Controls ◽  
Material Weakness ◽  
Material Weaknesses ◽  
Internal Control System ◽  
A Company ◽  
Big Four

Material weaknesses in the internal control system of a company create more opportunities for managers to engage in opportunistic earnings management. In this study the authors investigate the relation between earnings management and disclosed material weaknesses in the internal controls, both under SOX 302 and SOX 404, and examine whether audit quality, measured as being audited by a Big Four auditor, has an effect on that relation. The results suggest that material weakness firms have more absolute discretionary accruals and greater income-decreasing discretionary accruals. So evidence is provided that material weakness firms engage in more earnings management, however not in opportunistic income-increasing earnings management. When audit quality is high, measured as being audited by a Big Four auditor, the disclosed material weaknesses are lower just as total and absolute discretionary accruals are. It is also interesting in our findings that when material weakness firms are audited by a Big Four auditor a positive relationship seems to exist with discretionary accruals, suggesting that when a firm is audited by a Big Four auditor, material weaknesses in the internal controls will lead to opportunistic earnings management.

scholarly journals Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

2017 ◽  
Vol 39 (1) ◽  
pp. 25-44 ◽  
Author(s):  
Cristi A. Gleason ◽  
Morton Pincus ◽  
Sonja Olhoft Rego
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Early Years ◽  
Control Material ◽  
Material Weaknesses ◽  
Implementation Period ◽  
Tax Expense

ABSTRACT We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

Earnings Management of Firms Reporting Material Internal Control Weaknesses under Section 404 of the Sarbanes-Oxley Act

2008 ◽  
Vol 27 (2) ◽  
pp. 161-179 ◽  
Author(s):  
Kam C. Chan ◽  
Barbara Farrell ◽  
Picheng Lee
Keyword(s):  
Earnings Management ◽  
Internal Control ◽  
Internal Controls ◽  
Corporate Disclosure ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Potential Benefits ◽  
Internal Control Weaknesses ◽  
Reported Earnings

SUMMARY: The main objectives of the Sarbanes-Oxley Act of 2002 are to improve the accuracy and reliability of corporate disclosure. Under Section 404 of the Sarbanes-Oxley Act, the external auditor has to report an assessment of the firm’s internal controls and attest to management’s assessment of the firm’s internal controls. Material weaknesses in internal controls must be disclosed in the auditor and management reports. The objective of this study is to examine if firms reporting material internal control weaknesses under Section 404 have more earnings management compared to other firms. The results provide mild evidence that there are more positive and absolute discretionary accruals for firms reporting material internal control weaknesses than for other firms. Since the findings of ineffective internal controls by auditors under Section 404 may cause firms to improve their internal controls, Section 404 has the potential benefits of reducing the opportunity of intentional and unintentional accounting errors and of improving the quality of reported earnings.

scholarly journals The Empirical Research on the Correlation Between the Internal Control and Earning Management in Private Listed Companies

2021 ◽  
Vol 292 ◽  
pp. 02035
Author(s):  
Sheng-Nan Yan
Keyword(s):  
Control System ◽  
Earnings Management ◽  
Negative Correlation ◽  
Internal Control ◽  
Significant Negative Correlation ◽  
Listed Companies ◽  
Real Earnings Management ◽  
Earning Management ◽  
Internal Control System ◽  
Accrued Earnings

Under the background of industrial innovation, this paper takes the data of private listed companies from 2011 to 2016 as the sample for empirical analysis, and finds that internal control is an important factor in earnings management. There is a significant negative correlation between internal control and accrued earnings management and real earnings management. That is to say, having a good and rigorous internal control system can effectively reduce earnings management. Moreover, compared with earnings management of accounting selective activities, internal control has more restrictive effect on earnings management of real activities.

Determinants of the Persistence of Internal Control Weaknesses

2012 ◽  
Vol 26 (2) ◽  
pp. 307-333 ◽  
Author(s):  
Bonnie K. Klamm ◽  
Kevin W. Kobelsky ◽  
Marcia Weidenmier Watson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Management Training ◽  
Internal Controls ◽  
Senior Management ◽  
Data Availability ◽  
The Public ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Specific Control

SYNOPSIS This paper analyzes the degree to which material weaknesses (MWs) in internal control reported under the Sarbanes-Oxley Act of 2002 (SOX) affect the future reporting of MWs. Particularly, we examine information technology (IT) and non-IT MWs and their breakdown into specific IT-related entity-level, non-IT-related entity-level, and account-level deficiencies. Analysis reveals that most account-level and entity-level deficiencies occur at a significantly higher rate in SOX 404 reports with at least one IT MW than in MW reports with only non-IT MWs. Further, the presence and count of both types of MWs and all three types of deficiencies are associated with increased future MWs, as are lower profitability, non-Big 6 auditor, and firm complexity. Specific control deficiencies related to senior management, training, and IT control environment have the strongest impact on future MWs. These results indicate that effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. Data Availability:  Data are available from the public sources identified in the paper.

scholarly journals CONTROL OF QUALITY AS AN IMPORTANT TOOL FOR DEVELOPMENT OF INTERNAL CONTROL

2019 ◽  
Vol 48 (05) ◽  
pp. 5-7
Author(s):  
Tatia Udesiani
Keyword(s):  
Control System ◽  
Internal Control ◽  
Financial Management ◽  
Internal Audit ◽  
Internal Controls ◽  
Public Institutions ◽  
The Public ◽  
Internal Control System ◽  
Effective System ◽  
And Control

Development of internal controls is a highly important issue for the organization, especially for public institutions, because internal control system creates mechanism to effectively utilize human, financial and time resources. Public institutions are characterized by various risks, such as: uneconomic and unreasonable spending of budget funds, corruption, fraud and so on. In order to reduce these and other risks, it is important that organizations have an effective system of internal control. The internal control system in the public sector is regulatedby the relevant legislation and standards, which determines that internal control includes: Financial management and control system. Functionally independent internal audit and Harmonization Center. Each of them is an integral part of internal control. Their independence is the prerequisite for the existence of an effective system. The article presents results of our research carried out by the internal audit benefit and quality.

scholarly journals THE EFFECT OF GOVERNANCE QUALITY AND EARNING MANAGEMENT WITH INTERNAL CONTROL AS MODERATING VARIABLE TOWARDS FIRM VALUE

2020 ◽  
Vol 1 (2) ◽  
pp. 192-200
Author(s):  
Mufidah Mufidah ◽  
Ira Febrianti ◽  
Masnun Masnun
Keyword(s):  
Corporate Governance ◽  
Statistical Analysis ◽  
Earnings Management ◽  
Internal Control ◽  
Firm Value ◽  
Real Earnings Management ◽  
Internal Control System ◽  
Quality Of Governance ◽  
Governance Quality

The purpose of this study is to analyze the influence of the quality of corporate governance, real earnings management on firm value and to analyze the influence of the quality of corporate governance with the internal control system as a moderating variable on firm value in companies included in the LQ 45 index 2016-2018. The data in this study used descriptive statistical analysis and inferential statistical analysis. The results showed that the Quality of Governance had no significant effect on Firm Value, Earnings Management had a significant effect on Firm Value and Internal Control could not moderate the effect of Governance Quality on Firm Value.

Internal control and real earnings management in the French context

2020 ◽  
Vol 18 (2) ◽  
pp. 363-387 ◽  
Author(s):  
Sonda Wali ◽  
Sana Mardessi Masmoudi
Keyword(s):  
Control System ◽  
Earnings Management ◽  
Internal Control ◽  
Information Quality ◽  
Real Earnings Management ◽  
System Quality ◽  
Entire Study ◽  
Content Type ◽  
Control Quality ◽  
Internal Control System

Purpose This study aims to examine whether the internal control system quality in the French context improve the information quality having been reflected by the level of real earnings management (REM) measured by inventory overproduction, discretionary expenses reduction and sales manipulation. Design/methodology/approach The research uses a multiple regression analysis to examine the association between internal control and REM. The years 2010-2015 are used as analysis period by focusing on the French context. Three panel data are applied to the companies belonging to the Cotation Assistée en Continu (CAC) 40 index for the entire study period. Findings The results show that high internal control index has a negative impact on the REM and that better internal control indeed makes financial reporting more credible to investors. Further, the results demonstrate that control environment, risk assessment, control activities and monitor are the components that mainly affect REM. Originality/value The results contribute to the literature dealing with the relationship between internal control quality and REM by shedding light on the importance of internal control quality in improving information quality in the French context. Moreover, this study is using a quantitative measure of the internal control quality while much of the prior literature uses material weaknesses to estimate the effectiveness of internal control system.

scholarly journals EVALUASI SISTEM PENGENDALIAN INTERN (INTERNAL CONTROL) TERHADAP KINERJA DINAS PEKERJAAN UMUM PROVINSI SULAWESI UTARA

2017 ◽  
Vol 12 (2) ◽  
Author(s):  
Julia Christina Turangan ◽  
David Paul Elia Saerang ◽  
Rudy J. Pusung
Keyword(s):  
Qualitative Research ◽  
Control System ◽  
Internal Control ◽  
Data Reduction ◽  
Internal Controls ◽  
Control Performance ◽  
The Public ◽  
Public Sector Organization ◽  
Internal Control System ◽  
Effectiveness And Efficiency

Implementation of internal control system is needed so that activities can be implemented effectively and efficiently, and generate a reliable reports. As one of the public sector organization, Dinas Pekerjaan Umum Provinsi Sulawesi Utara also requires internal control for the effectiveness and efficiency of their activities and produce a reliable reporting to reduce abuse of authority from irresponsible parties. The purpose of this research is to evaluate the system of internal control on performance of Dinas Pekerjaan Umum Provinsi Sulawesi Utara. The method that used in this research is qualitative research methods with data analisys technique is data reduction, presentation of data, and conclusions. The results of this study are internal controls applied by Dinas Pekerjaan Umum Provinsi Sulawesi Utara has been effective and adequate. Realization of expenditure Dinas Pekerjaan Umum Provinsi Sulawesi Utara from 2013 to 2015 has been effective.Keywords : Evaluation, Internal control, Performance

The Severity of Internal Controls over Financial Reporting Deficiencies: Differences among Types and Industries

2014 ◽  
pp. 55-77
Author(s):  
Tatiana Mazza ◽  
Stefano Azzali
Keyword(s):  
Information Technology ◽  
Financial Reporting ◽  
Internal Control ◽  
Service Industry ◽  
Listed Companies ◽  
Internal Controls ◽  
Service Companies ◽  
Finance Industry ◽  
Material Weaknesses ◽  
Fixed Assets

This study analyzes the severity of Internal Control over Financial Reporting deficiencies (Deficiencies, Significant Deficiencies and Material Weaknesses) in a sample of Italian listed companies, in the period 2007- 2012. Using proprietary data the severity of the deficiencies is tested for account-specific, entity level and information technology controls and for industries (manufacturing and services vs finance industries). The results on ICD severity is compared with one of the most frequent ICD (Acc_Period End/Accounting Policies): for account-specific, ICD in revenues, purchase, fixed assets and intangible, loans and insurance are more severe while ICD in Inventory are less severe. Differences in ICD severity have been found in the characteristic account: ICD in loan and insurance for finance industry and ICD in revenue, purchase for manufacturing and service industry are more severe. Finally, we found that ICD in entity level and information technology controls are less severe than account specific ICD in all industries. However, the results on entity level and information technology deficiencies could also mean that the importance of these types of control are under-evaluated by the manufacturing and service companies.

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