Perceptions of Tone at the Top from the Inside: Insights into Audit Pricing

2021 ◽  
Author(s):  
Jace Garrett ◽  
Rani Hoitash ◽  
Douglas F. Prawitt
Keyword(s):  
Risk Assessment ◽  
Financial Reporting ◽  
Internal Control ◽  
Employee Perceptions ◽  
Audit Pricing ◽  
Management Communication ◽  
Tone At The Top ◽  
Material Weaknesses ◽  
Assessment Decisions

Tone at the top plays an important role in entities’ internal control over financial reporting (ICFR) and in auditors’ planning and risk assessment decisions. Using a novel measure based on employee perceptions, we find that strong tone at the top is associated with reduced audit pricing and that this relation holds even for firms that report effective ICFR. This relation is stronger when employees’ tone perceptions are more consistent throughout the organization, when accounting is more complex, and when earnings manipulation risk is higher. We also find that strong tone is negatively associated with the incidence of reported material weaknesses and positively associated with positive abnormal accruals, and that the management integrity component of tone is more strongly associated with audit pricing than is the quality of management communication. Finally, we find evidence that auditors become familiar with employees' tone perceptions in the normal course of an audit.

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.

Are Material Weaknesses in Internal Controls Associated with Poor M&A Decisions? Evidence from Goodwill Impairment

2017 ◽  
Vol 37 (4) ◽  
pp. 49-74 ◽  
Author(s):  
Dennis H. Caplan ◽  
Saurav K. Dutta ◽  
Alfred Zhu Liu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Managerial Performance ◽  
Goodwill Impairment ◽  
Material Weaknesses

SUMMARY This paper examines the effect of the quality of a firm's internal control over financial reporting (ICFR) on the quality of corporate M&A decisions. We use material weaknesses in internal control (ICMWs) from SOX 404 audits as a proxy for the quality of a firm's ICFR and use future goodwill impairment to proxy for the quality of managers' M&A decisions. We find that goodwill recognized from acquisitions in years concurrent with ICMWs has a greater rate of impairment in subsequent years than goodwill recognized from acquisitions in years without ICMWs, thereby establishing a link between ICMW and goodwill impairment. We further show that disclosure and remediation of ICMWs appear to improve valuations of subsequent acquisitions. Our study contributes to the literature on internal controls by documenting unanticipated benefits of SOX 404 audits on managerial performance, and to the goodwill literature by identifying ICMWs as a determinant of goodwill impairment.

Internal control and financial reporting quality of small firms

2020 ◽  
Vol 19 (2) ◽  
pp. 221-246
Author(s):  
Jagan Krishnan ◽  
Jayanthi Krishnan ◽  
Sophie Liang
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Small Firms ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Policy Debate ◽  
Content Type ◽  
Material Weaknesses ◽  
The Impact

Purpose The Dodd–Frank Act of 2010 exempts small, non-accelerated filers from compliance with Sarbanes–Oxley Act (SOX) Section 404b internal control audits. However, these firms are required to comply with other internal control regulations, namely, SOX Sections 302 and 404a, starting in 2002 and 2007, respectively. A small number of these firms also voluntarily adopted (and sometimes dropped) Section 404b during 2004-2010. The purpose of this study is to investigate the impact of a series of internal control regulations introduced by SOX on the financial reporting quality of small firms. Design/methodology/approach The research design for this study is empirical. Using unsigned and signed discretionary accruals as measures of financial reporting quality, the authors compare the financial reporting quality for adopters and non-adopters across four regulation regimes over the period 2000-2010: PRESOX, SOX 302, SOX 404a and SOX 404b. Findings The results indicate that most of the adopters and non-adopters benefited from SOX 302 and 404a compared with the PRESOX period. However, only the non-adopters gained incrementally when moving from SOX 302 to SOX 404a. Also, Section 404b benefited firms with material weaknesses, as well as firms without material weaknesses that had the lowest reporting quality, in the PRESOX period. Research limitations/implications This study helps inform the important policy debate on whether to increase the threshold that is used for the SOX 404b exemption. It shows incremental benefits for firms that adopted Section 404b audits, even when they were complying with Section 302 and Section 404a. Consequently, extending the exemption to more companies would result in a loss of the reporting quality benefit of 404b. Originality/value This study contributes to the literature by focusing exclusively on non-accelerated filers and by examining differences across four regulation regimes over a long window compared to prior studies. It provides evidence that the financial reporting benefit of SOX 404b is not transitional, but rather extends for a few years even after some firms discontinued the 404b audits.

The Quality of Internal Control over Financial Reporting in Family Firms

2014 ◽  
Vol 29 (1) ◽  
pp. 41-60 ◽  
Author(s):  
Indranil Bardhan ◽  
Shu Lin ◽  
Shu-Ling Wu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Family Firms ◽  
Developed Countries ◽  
Firm Characteristics ◽  
Undue Influence ◽  
Material Weaknesses ◽  
Dual Class Shares ◽  
Dual Class

SYNOPSIS Family firms represent a majority of businesses worldwide, and play a crucial role in the socio-economic development of both developed countries and emerging economies. We study the relationship between family firm characteristics and the quality of internal control over financial reporting, relative to non-family firms. Using a relatively large sample of S&P 500 firms, we report that family firms exhibit more material weaknesses in their internal control over financial reporting than non-family firms. Further investigation suggests that the greater likelihood of material weaknesses is driven by family firms with dual-class shares. Our results are consistent with the entrenchment argument that family owners are motivated to maintain weaker internal controls in order to extract private benefits. Our study contributes to the extant literature on family firms by providing further insight into the mechanisms through which family firms can exert undue influence on internal control over financial reporting.

Pengaruh Kualitas Sumber Daya Manusia, Pemanfaatan Teknologi Informasi, Dan Sistem Pengendalian Intern Terhadap Ketepatwaktuan Pelaporan Keuangan Pemerintah Desa

2018 ◽  
Vol 26 (2) ◽  
pp. 131-143
Author(s):  
Marlinawati Marlinawati ◽  
Dewi Kusuma Wardani
Keyword(s):  
Information Technology ◽  
Control System ◽  
Human Resources ◽  
Financial Reporting ◽  
Internal Control ◽  
Positive Influence ◽  
Internal Control System ◽  
Speed Up ◽  
Village Government

The purpose of this research is to know the influence between the Quality of Human Resources, Utilization of Information Technology and Internal Control System Against Timeliness of Village Government Financial Reporting at Gunungkidul Regency. This research is causative research. The population is the village government in Gunungkidul Regency, especially in Gedangsari subdistrict. Criteria of respondents in the study were to village and village apparatus. We use questionnaire to collect data. We use multiple regression with SPSS program version 16.0 to analyze data. We find that quality of human resources and internal control system have a positive influence on the timeliness of village government financial reporting. On the other hand, utilization of information technology does not influence the timeliness of village government financial reporting. These imply that the quality of human resources and internal control system can speed up the preparation of village government financial reporting.

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.

They Protect Us from Computer Fraud: Who Protects Us from Them? SafeNet, Inc.: A Case of Fraudulent Financial Reporting

2015 ◽  
Vol 30 (4) ◽  
pp. 353-372 ◽  
Author(s):  
Leisa L. Marshall ◽  
James Cali
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Stock Options ◽  
Governance Structure ◽  
Fraud Triangle ◽  
Fraudulent Financial Reporting ◽  
Corporate Governance Structure ◽  
Chief Operating Officer ◽  
Tone At The Top ◽  
Prevention Methods

ABSTRACT This case focuses on fraudulent financial reporting as related to the tone at the top, primarily the chief operating officer, Carole Argo, of SafeNet, Inc. (SafeNet). This case provides students a real-world example by which to apply basic fraud concepts including the fraud triangle, fraud prevention, and red flags (fraud symptoms). Students analyze SafeNet to identify deficiencies and prevention methods, from the perspective of COSO's (2013) Internal Control—Integrated Framework's internal control objectives, components, and principles. Students also analyze SafeNet's corporate governance structure by comparing SafeNet's Board of Directors and its subcommittees pre- and post-SOX. Students learn of stock options as a form of compensation. However, this case does not focus on the details of accounting for stock options. This case is appropriate for students with the financial accounting principles course background. This case was classroom tested in a basic fraud examination course and an internal auditing course. Students' responses in both courses support the use of the case as a learning tool.

Effect Technology Information On Quality Financial Statement With Internal Control As Moderating Variable

2021 ◽  
Vol 2 (1) ◽  
pp. 9-13
Author(s):  
Aris Eddy Sarwono ◽  
Asih Handayani
Keyword(s):  
Information Technology ◽  
Control System ◽  
Financial Reporting ◽  
Internal Control ◽  
Local Governments ◽  
Sampling Technique ◽  
Financial Statement ◽  
Financial Reports ◽  
Internal Control System

The problem with the low quality of financial reports in local governments is the reason this research was conducted. This research was conducted with the aim of analyzing the use of information technology on the quality of financial reports by considering the internal control system (SPI) factor. The location of this research is in the Karisidenan Surakarta area which includes 6 districts and 1 city. The population of this research is all state civil servants (ASN) in local governments who work in accounting. The sampling technique was using purposive sampling method. The results showed that the use of information technology had a positive effect on the quality of financial reporting in local governments, while the internal control system moderated the effect of the use of information technology on the quality of financial reporting in local governments.

scholarly journals Influence of the Quality of Accrual Financial Report Information with the Roles of Accounting Information System as an Intervening Factor

2017 ◽  
Vol 8 (2) ◽  
pp. 84
Author(s):  
Dyah Purwanti ◽  
Ghulbudin Isham Natser
Keyword(s):  
Information System ◽  
Human Resources ◽  
Financial Reporting ◽  
Internal Control ◽  
Accounting Information ◽  
Primary Data ◽  
Accounting Information System ◽  
The Government ◽  
The Impact

<p>This study aims to find empirical evidence about the role of accounting information system (AIS) as intervening factors that affect the quality of financial reporting information of the government. This study uses a questionnaire that primary data collected from respondents, namely employees of the accounting department of the government units, especially a partner institution in the State Treasury Office (KPPN) 2 Jakarta. Data processing is performed by the method of partial least squares (PLS). The results of this study are the accounting information system has significantly the impact on the quality of government financial reporting information. While the capacity factor of human resources, control data input and application of Government Accounting Standards (SAP) have a significant direct effect on the AIS, is larger when compared to a direct influence on the quality of financial reporting information. Other factors, organizational commitment and internal control system has a significant influence either directly or indirectly on the quality of financial reporting information. The findings of the study are expected to provide input to the government the importance of improving the accounting information system, such as strengthening the capacity of human resources and accounting applications in realizing quality financial information.</p>

scholarly journals PENGARUH IMPLEMENTASI MANAJEMEN ASET TETAP DAN IMPLEMENTASI PENGENDALIAN INTERNAL TERHADAP KUALITAS PELAPORAN KEUANGAN (Pada Pemkab/Pemkot Di Wilayah Pemerintahan Provinsi Jabar)

2018 ◽  
Vol 4 (2) ◽  
pp. 72-82
Author(s):  
Yani Kurniasih
Keyword(s):  
Control System ◽  
Local Government ◽  
Financial Reporting ◽  
Internal Control ◽  
Asset Management ◽  
Partial Least Square ◽  
Equation Modeling ◽  
Survey Method ◽  
Internal Control System

This research was conducted with the background of the phenomena that occur under audit results by the audit Board of the Republic of Indonesia that the poor quality of financial reporting, especially in local government both provincial and city/district. This research was conducted based on theories that already exist which later develoved into a research model in which the model in this study was designed to eximine the quality of financial reporting ands its relevance to the implementation of the asset management and implementation of the internal control.             This study aims to test and obtain empirical evidense of research in oder to obtain answers to the problems of research on how much influense of Implementation of the Asset Management and Implementation of the Internal control on the quality of financial Reporting. The benefits of research is to provide a scientific contribution to the science of public sector accounting and solve problems for local goverments in the implementations of task related to improving the quality of local government financial reporting.             This study used survey method with descriptive verification approach and type of causal research conducted at 28 local government both provincial and city/district.in west java. The unit of observation is the Departement of local Asset and finance management (DPKAD) Respondents in this study is the Head of departement, Secretary of departement, Head of Accounting and Head of Assets, Auditor of Inspektorat and Auditor of BPK RI representatives of western java . The data obtained through the questionnaiers were analyzed using the technique of component-Based Structural Equation Modeling (CBSEM) and processed using program Partial Least Square-Path Modeling (PLS-PM) The result showed that : the Implementation of the asset management have a significant affect on the quality of financial reporting; the implementation of the internal control system have a significant effect on the quality of financial reporting;   Keywords : the Implementation of the Asset Management and The Implementation of the Internal Control system.

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