Firm Characteristics and Voluntary Management Reports on Internal Control

2006 ◽  
Vol 25 (2) ◽  
pp. 25-39 ◽  
Author(s):  
Scott N. Bronson ◽  
Joseph V. Carcello ◽  
K. Raghunandan
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Annual Report ◽  
Institutional Ownership ◽  
Income Growth ◽  
Sales Growth ◽  
Firm Characteristics ◽  
Control Effectiveness ◽  
Sarbanes Oxley ◽  
Material Weaknesses

This study provides evidence on the nature of voluntary management reports on internal control (MRIC), and on the characteristics of firms issuing such reports, before internal control reports were mandated under Section 404 of the Sarbanes-Oxley Act. We examine the association between firm characteristics and the voluntary inclusion of an MRIC in the firm's annual report. Our analysis of 397 midsized firms in 1998 indicates that a voluntary MRIC is more likely for firms that are larger, have an audit committee that meets more often, have a greater level of institutional ownership, and have more rapid income growth. We find that a voluntary MRIC is less likely for companies with more rapid sales growth. Slightly more than one-third of our sample issues an MRIC. None of the voluntary MRICs mention any material weaknesses; no reports include an auditor attestation; less than half (41 percent) of the reports include a statement that controls were effective; and only three of these reports include the criteria used to assess control effectiveness.

Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes

2009 ◽  
Vol 84 (3) ◽  
pp. 839-867 ◽  
Author(s):  
Udi Hoitash ◽  
Rani Hoitash ◽  
Jean C. Bedard
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Expertise ◽  
Financial Expert ◽  
Section 302

ABSTRACT: This study examines the association between corporate governance and disclosures of material weaknesses (MW) in internal control over financial reporting. We study this association using MW reported under Sarbanes-Oxley Sections 302 and 404, deriving data on audit committee financial expertise from automated parsing of member qualifications from their biographies. We find that a lower likelihood of disclosing Section 404 MW is associated with relatively more audit committee members having accounting and supervisory experience, as well as board strength. Further, the nature of MW varies with the type of experience. However, these associations are not detectable using Section 302 reports. We also find that MW disclosure is associated with designating a financial expert without accounting experience, or designating multiple financial experts. We conclude that board and audit committee characteristics are associated with internal control quality. However, this association is only observable under the more stringent requirements of Section 404.

scholarly journals Internal control effectiveness – a clustering approach

2016 ◽  
Vol 31 (1) ◽  
pp. 5-34 ◽  
Author(s):  
Aapo Länsiluoto ◽  
Annukka Jokipii ◽  
Tomas Eklund
Keyword(s):  
Internal Control ◽  
Control Structure ◽  
Three Dimensional ◽  
Self Organizing Map ◽  
Neural Network Approach ◽  
Content Type ◽  
Control Effectiveness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Clustering Approach

Purpose – This study aims to examine and visualize the adopted internal control structure and effectiveness in firms and present a typology of firms. Control structure and effectiveness are measured based on the assessment of management, rather than using reported material weaknesses as most studies do. This type of evaluation is more purposeful for firms that do not apply the Sarbanes-Oxley Act. Internal control frameworks provide only broad guidance concerning internal control concepts, leaving the details to the adopting firms. Design/methodology/approach – The survey data (from 741 CEOs) are clustered using the self-organizing map, a visual artificial neural network approach. A three-dimensional effectiveness proxy is used. Findings – The analysis reveals four alternative types of internal control effectiveness in firms and visually presents how the components of the internal control structure are associated with each one. A typology of internal control structure and effectiveness is then created. Practical implications – The findings suggest that there are interrelated, but not straightforward, relationships between internal control variables and that there is a link between some of them and higher internal control effectiveness in practice. These findings have important implications for those responsible for improving or assessing internal control, such as management, personnel and internal and external auditors. Originality/value – This paper uses a clustering approach to create a typology for alternative types of internal control structure and effectiveness, based on data from actual firms. Instead of using material weaknesses as a measure, this study uses managers’ own assessments of internal control effectiveness.

scholarly journals FAKTOR-FAKTOR YANG MEMPENGARUHI FINANCIAL DISTRESS MENGGUNAKAN SURVIVAL ANALYSIS

2020 ◽  
Vol 6 (1) ◽  
pp. 31-42
Author(s):  
Aulia Kania Putri ◽  
Farida Titik Kristanti
Keyword(s):  
Survival Analysis ◽  
Firm Size ◽  
Internal Control ◽  
Financial Distress ◽  
Audit Committee ◽  
Negative Impact ◽  
Stock Exchange ◽  
Institutional Ownership ◽  
Sales Growth ◽  
Board Of Director

The aim of this research is to find that liquidity ratio, sales growth, audit committee, institutional ownership, managerial owership, firm size, board of director and independent commissioner can predict the possibility of financial distress. The object of the research conducted on the mining sector and basic industry and chemicals sectors listed in Indonesian Stock Exchange (IDX) 2009-2018 with a total 70 samples. This study uses survival analysis as a method with cox proportion hazard model. This result of this research that liquidity ratio and audit committee have a negative impact on financial dsitress. Meanwhile, sales growth, firm size, institutional ownership, independent commissioner, board of director and  managerial ownership does not have impact on financial distress. The implication of this study is that the company is expected to be able to maintain liquidity at a safe level and increase the internal control.

Observed effectiveness of the COSO 2013 framework

2019 ◽  
Vol 16 (1) ◽  
pp. 31-45
Author(s):  
Ifeoma Udeh
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Design Methodology ◽  
Control Process ◽  
Regression Analyses ◽  
Section 404 ◽  
Content Type ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Practical Implications

Purpose This paper aims to examine the effectiveness of the Committee of Sponsoring Organization’s 2013 Framework, by investigating how the number of auditor-reported material weaknesses compares for Early-, Timely- and Late-adopters of the framework, and how the number of auditor-reported material weaknesses changed for Early- and Timely-adopters following their adoption of the framework. Design/methodology/approach The paper uses regression analyses based on a sample of US firms subject to Sarbanes-Oxley Act Section 404(b). Findings Timely-adopters of the 2013 Framework continued to exhibit fewer instances of auditor-reported material weaknesses than Late-adopters, even though they had a marginal increase in the number of auditor-reported material weaknesses, in the post-2013 Framework period. Practical implications The findings suggest that the effectiveness of the 2013 Framework may lie in the iterative nature of the internal control process, and as firms remedy deficiencies they or their auditors identify, they will continuously improve the effectiveness of their internal control systems. Originality/value Unlike existing literature, this paper uses data from the pre-2013 Framework, transition and post-2013 Framework periods to examine changes in the number of auditor-reported material weaknesses, thus differentiating between Early-, Timely- and Late-adopters of the 2013 Framework. It also shows the effect of adopting the 2013 Framework on the number of auditor-reported material weaknesses.

Using Communication Theory to Teach SOX Reporting Requirements

2011 ◽  
Vol 26 (1) ◽  
pp. 241-256 ◽  
Author(s):  
Marsha Weber ◽  
Sheri Erickson ◽  
Mary Stone
Keyword(s):  
Image Restoration ◽  
Internal Control ◽  
Communication Theory ◽  
Corporate Image ◽  
Annual Reports ◽  
Instructional Resource ◽  
Analytical Skills ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Restoration Strategies

ABSTRACT: This paper presents an instructional resource and provides suggestions for its implementation. The resource demonstrates a method for teaching students how communication in required SOX Section 404 reports can impact stakeholders’ perceptions of that organization. Students read portions of selected 10-K, 10-Q, and corporate annual reports in which management responds to disclosed internal control material weaknesses. Students then analyze these excerpts according to a well-known image restoration strategy. This assignment enhances written communication skills, analytical skills, research skills, and deepens students’ understanding of Sarbanes-Oxley 404 requirements and of corporate image restoration strategies. The instructional resource would be beneficial in auditing, intermediate, or advanced accounting, as well as a graduate-level accounting course.

scholarly journals Corporate governance characteristics of firms reporting internal control deficiencies

2011 ◽  
Vol 8 (2) ◽  
pp. 363-390
Author(s):  
Kathleen Rupley
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
High Growth ◽  
Audit Committees ◽  
Market Reactions ◽  
Sarbanes Oxley ◽  
Internal Control Deficiencies ◽  
Nominating Committees

From a sample of firms reporting internal control deficiencies (ICD), I compare corporate governance structures to industry, exchange, and size – matched firms. I examine market reactions to reports of ICDs in 8-K filings. Additionally, I examine shifts in corporate governance characteristics since the Sarbanes-Oxley Act of 2002 (SOX). Results indicate that weaker boards, larger audit committees, less independent nominating committees, and high growth companies are associated with ICDs. Market reaction is negative to ICD disclosures when they are associated with controls over revenue. Firms have made changes post-SOX including reduced non-audit services, more frequent audit committee meetings, formation of nominating and governance committees, creation of internal audit functions, and implementation of corporate governance policies.

scholarly journals Predicting Material Weaknesses In Internal Control Systems After The Sarbanes-Oxley Act Using Multiple Criteria Linear Programming And Other Data Mining Approaches

2011 ◽  
Vol 25 (6) ◽  
Author(s):  
Wikil Kwak ◽  
Susan Eldridge ◽  
Yong Shi ◽  
Gang Kou
Keyword(s):  
Data Mining ◽  
Linear Programming ◽  
Internal Control ◽  
Foreign Currency ◽  
Predictive Ability ◽  
Cash Flows ◽  
Multiple Criteria ◽  
Font Size ◽  
Sarbanes Oxley ◽  
Material Weaknesses

<h1 style="TEXT-JUSTIFY: inter-ideograph; TEXT-ALIGN: justify; MARGIN: 0in 0.5in 0pt"><span style="font-family: Times New Roman;"><span style="COLOR: black; FONT-SIZE: 10pt">Our study proposes a multiple criteria linear programming (MCLP) </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">and other data mining </span><span style="COLOR: black; FONT-SIZE: 10pt">method</span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">s</span><span style="COLOR: black; FONT-SIZE: 10pt"> to predict </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">material weaknesses in a firm&rsquo;s internal control system after the Sarbanes-Oxley Act</span><span style="COLOR: black; FONT-SIZE: 10pt"> (SOX) using </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">2003-2004</span><span style="COLOR: black; FONT-SIZE: 10pt"> </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">U.S. </span><span style="COLOR: black; FONT-SIZE: 10pt">data.<span style="mso-spacerun: yes">&nbsp; </span>The results of the MCLP </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">and other data mining </span><span style="COLOR: black; FONT-SIZE: 10pt">approaches in </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">our</span><span style="COLOR: black; FONT-SIZE: 10pt"> </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">prediction </span><span style="COLOR: black; FONT-SIZE: 10pt">study show that the </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">MCLP</span><span style="COLOR: black; FONT-SIZE: 10pt"> method performs</span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO"> </span><span style="COLOR: black; FONT-SIZE: 10pt">better overall than the </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">other data mining approaches </span><span style="COLOR: black; FONT-SIZE: 10pt">using financial </span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO">and other </span><span style="COLOR: black; FONT-SIZE: 10pt">data from the Form 10-K report.</span><span style="COLOR: black; FONT-SIZE: 10pt; mso-fareast-language: KO"><span style="mso-spacerun: yes">&nbsp; </span>Consistent with prior research, firms that disclosed material weaknesses in their SOX Section 302 disclosures were more complex (based on the existence of foreign currency translations), more often used Big 4 auditors, and had lower operating cash flows-to-total assets ratios than the non-material weakness control firms.<span style="mso-spacerun: yes">&nbsp; </span>Because of mixed results on several profitability measures and marginal predictive ability for the MCLP and other methods used, more research is needed to identify firm characteristics that help investors, auditors, and others predict material weaknesses.</span></span></h1>

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.

Early Warnings of Internal Control Problems: Additional Evidence

2012 ◽  
Vol 32 (2) ◽  
pp. 171-188 ◽  
Author(s):  
Vishal Munsif ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Fiscal Year ◽  
Section 404 ◽  
Time Period ◽  
Material Weaknesses ◽  
The Difference ◽  
Using Data ◽  
Section 302 ◽  
Early Warnings

SUMMARY: Hermanson and Ye (2009; hereafter, HY) find that in the initial year of SOX Section 404 implementation, only 27 percent of accelerated filer firms with an adverse Section 404(b) report had disclosed such material weaknesses (MWs) in internal control in Section 302 certifications in previous quarters of the same fiscal year. We extend HY by examining (1) a more recent time period (using data from fiscal years 2007 and 2008), and (2) both accelerated and non-accelerated filers. We find that the proportion of accelerated filers (with adverse Section 404 reports) that have early warnings (in Section 302 certifications in previous quarters of the same fiscal year) is less than 50 percent even in the fourth and fifth years of Section 404 reporting. We also find that, after controlling for other factors, non-accelerated filers were more likely to have early warnings than accelerated filers in 2008; however, the difference is not significant in 2007. Early warning is more likely for firms with (1) a higher number of MWs, (2) a new CFO, (3) more audit committee members, and (4) more frequent audit committee meetings.

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