Do Managers Make Voluntary Accounting Changes in Response to a Material Weakness in Internal Control?

2018 ◽  
Vol 37 (2) ◽  
pp. 107-137 ◽  
Author(s):  
Marsha B. Keune ◽  
Timothy M. Keune
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Accounting Information ◽  
Accounting Standards ◽  
Data Availability ◽  
Material Weakness ◽  
Accruals Quality ◽  
Accounting Principle ◽  
Accounting Changes

SUMMARY This study examines whether managers make voluntary changes in accounting principle in response to a material weakness (MW). We find that managers are more likely to report voluntary changes in the same year as and year following a MW disclosure, a result largely driven by companies with a greater number of MWs. Although MW companies with new CFOs are more likely to make voluntary changes in the same year, restatements and new auditors, CFOs, CEOs, and directors are not the primary drivers of these results. Managers of MW companies justify voluntary changes as improving accounting information, conforming internal policies, and providing administrative benefits. MW companies that report voluntary changes in the same year and justify the changes as improving accounting are more likely to remediate at least one MW in the following year. Further, entity-level MW companies with voluntary changes in the same year are associated with higher accruals quality than other entity-level MW companies, and a similar result holds for companies with more MWs. These results suggest that MW companies likely report voluntary changes as part of a strategy to improve financial reporting processes and policies. Our study informs both internal control policymakers and accounting standards setters. Data Availability: All data are publicly available from sources identified in the study.

Management Reporting on Internal Control and Accruals Quality: Insights from a “Comply-or-Explain” Internal Control Regime

2011 ◽  
Vol 30 (3) ◽  
pp. 181-209 ◽  
Author(s):  
Katrien Van de Poel ◽  
Ann Vanstraelen
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Control Regulation ◽  
Accruals Quality ◽  
Regulatory Regimes ◽  
The Relationship ◽  
Control Regime ◽  
Comply Or Explain

SUMMARY Internal control regulation remains the subject of an ongoing global debate among academics, regulators, and practitioners in terms of costs and effectiveness. This is reflected by different internal control regulations in different countries, resulting in varying management's incentives across regulatory regimes. Prior research, however, has primarily focused on the U.S. rules-based setting to study the relationship between internal control regulation and financial reporting. The purpose of this paper is to study the relationship between internal control reporting and accruals quality in an alternative internal control regime based on the “comply-or-explain principle” in The Netherlands. We show that in this setting accruals quality is not associated with the description of the internal control system, while there is evidence of a positive association with an unaudited statement of effective internal controls. Further, we find that the noncompliance rate of providing a statement of effective internal controls is relatively high, and that companies give generic explanations for noncompliance or no explanation at all. Overall, insights from different internal control regulatory regimes may further advance our knowledge on internal control regulation effectiveness. Data Availability: All data are publicly available.

scholarly journals Audit Partners' Judgments and Challenges in the Audits of Internal Control over Financial Reporting

2020 ◽  
Vol 39 (4) ◽  
pp. 57-85
Author(s):  
Jeffrey R. Cohen ◽  
Jennifer R. Joe ◽  
Jay C. Thibodeau ◽  
Gregory M. Trompeter
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Data Availability ◽  
Audit Committees ◽  
Structured Interviews ◽  
Material Weakness ◽  
The Public ◽  
National Office ◽  
Evaluation Task ◽  
Public Company

SUMMARY Internal control over financial reporting (ICFR) audits have been the subject of intensive examination by the Public Company Accounting Oversight Board (PCAOB) and researchers but the process through which auditors make ICFR judgments is largely a “black box.” To understand ICFR judgments, we conducted semi-structured interviews with 20 audit partners. Common themes in our interviews suggest that the subjectivity inherent in the ICFR evaluation task contributes to resistance against ICFR audit findings and cougnterarguments from management. Moreover, auditors perceive that their judgments are being second-guessed by PCAOB inspectors. Auditors believe that managers have difficulty accepting that material weaknesses can exist without a detected error, that management's reflexive reaction is to deny/avoid a material weakness finding, and managers routinely claim that management review controls (MRCs) would have caught the detected control deficiency. Auditors cope with management's defenses by consulting with their national office and leveraging support from strong audit committees. Data Availability: Requests for the data should be accompanied by a description of intended uses.

Internal Control Quality and Investment Efficiency

2020 ◽  
Vol 34 (2) ◽  
pp. 125-145 ◽  
Author(s):  
Shu-Miao Lai ◽  
Chih-Liang Liu ◽  
Sheng-Syan Chen
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Capital Expenditure ◽  
Reporting Quality ◽  
Cash Flows ◽  
Data Availability ◽  
Investment Efficiency ◽  
Material Weakness ◽  
Fixed Assets

SYNOPSIS We investigate whether the quality of internal control over financial reporting (ICOFR) has implications for the quality of internal control over fixed assets by examining the relation between material weaknesses (MWs) and investment efficiency. After excluding restating firms and controlling for externally reported earnings quality and the potential endogeneity of material weakness disclosure, we find that managers in firms with weak ICOFR are more likely to make inefficient investments. This relation is stronger when investment-specific MWs are related to capital expenditure and property, plant, and equipment. We further show a significantly negative relation between future cash flows and investments made by firms with weak ICOFR. Overall, our findings are distinct from prior studies in that they are independent of financial reporting quality and suggest that weak ICOFR implies that internal controls over fixed assets failed as well. Data Availability: Data are available from public sources identified in the paper.

Accruals Quality and Internal Control over Financial Reporting

2007 ◽  
Vol 82 (5) ◽  
pp. 1141-1170 ◽  
Author(s):  
Jeffrey T. Doyle ◽  
Weili Ge ◽  
Sarah McVay
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Internal Controls ◽  
Earnings Persistence ◽  
Firm Characteristics ◽  
Material Weakness ◽  
Material Weaknesses ◽  
Accruals Quality

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 “audit around.” 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.

Selecting Railway Investments in 1890s America

2017 ◽  
Vol 44 (1) ◽  
pp. 77-93
Author(s):  
Joel E. Thompson
Keyword(s):  
Financial Reporting ◽  
Accounting Information ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Investment Strategies ◽  
Financial Accounting Standards Board ◽  
Accounting Data ◽  
Rational Decisions

ABSTRACT The purpose of financial reporting is to provide information to investors and creditors to help them make rational decisions (Financial Accounting Standards Board [FASB] 2010). Tracing the development of investors' methods should help with understanding the role of financial accounting. This study examines investment practices involving railways in 1890s America. As such, it furthers our knowledge about the development of investment methods and their necessary information. Moreover, it shows that as investment methods grew in sophistication, there was an enhanced demand for greater comparability in accounting data to make meaningful analyses. Competing investment strategies, largely devoid of accounting information, are also discussed.

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>

2. The international evolution of accounting

2014 ◽  
Author(s):  
Christopher Nobes
Keyword(s):  
Financial Reporting ◽  
Accounting Information ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Generally Accepted Accounting Principles ◽  
Financial Reporting Standards ◽  
Financial Position ◽  
The Us ◽  
Company Directors ◽  
Double Entry

What are the purposes of accounting? How do these purposes affect how accounting works? What is double-entry bookkeeping? ‘The international evolution of accounting’ considers these questions and outlines some examples of how different countries have contributed to the development of accounting. Double-entry bookkeeping, conceived in thirteenth-century Italy, balances the debits and credits. It enables the calculation of profit and the presentation of a business's financial position. Publication of accounting information is required to protect shareholders and creditors from potential malpractice by company directors. The globalization of world business has resulted in International Financial Reporting Standards, now used by around 90 countries. The US use their Financial Accounting Standards Board's ‘generally accepted accounting principles’.

The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements

2015 ◽  
Vol 91 (4) ◽  
pp. 1167-1194 ◽  
Author(s):  
Jun Guo ◽  
Pinghsun Huang ◽  
Yan Zhang ◽  
Nan Zhou
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Employee Benefits ◽  
Data Availability ◽  
Top Executives ◽  
Material Weaknesses ◽  
Financial Restatements ◽  
Treatment Policies ◽  
Employee Treatment

ABSTRACT This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

Accounting Transparency and International Standard Setting

2014 ◽  
pp. 455-476
Author(s):  
Sidney J. Gray ◽  
Helen Kang
Keyword(s):  
Financial Reporting ◽  
Accounting Information ◽  
Accounting Standards ◽  
Standard Setting ◽  
International Accounting Standards ◽  
Corporate Accountability ◽  
Future Prospects ◽  
Market Reactions ◽  
International Standard ◽  
Financial Reporting Standards

This chapter explores accounting transparency as an important aspect of corporate accountability. After defining accounting transparency and identifying factors that influence it, the chapter considers the debate between providers and users of accounting information on how transparent accounting information should be defined, measured, and reported. It also discusses the roles of international standard-setting organizations in promoting accounting transparency as well as measures of accounting transparency, including disclosure level and market reactions. Finally, it looks at future prospects for setting international accounting standards, paying particular attention to International Financial Reporting Standards.

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