The Influence of Audit Committee Expertise on Firms' Internal Controls: Evidence from Mergers and Acquisitions

2020 ◽  
Vol 34 (3) ◽  
pp. 193-211
Author(s):  
Mikhail Sterin
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Committees ◽  
First Year ◽  
Opt Out ◽  
Indirect Path ◽  
Control Decision

SYNOPSIS This study examines how audit committee expertise influences firms' key internal control scoping decisions. Using a unique merger and acquisition (M&A) setting where the internal control audit is voluntary, I study whether audit committee expertise is associated with the deferral of internal control testing for acquired firms. I also examine whether this internal control decision provides a channel through which audit committee expertise leads to positive financial reporting outcomes. I find that audit committees with greater specialized expertise (industry and legal) are less likely to opt-out of first-year target internal control over financial reporting (ICFR) integration. In my second analysis, I find that target ICFR integration provides an indirect path through which industry and legal expertise reduce the likelihood of misstatement. This study contributes to the audit committee and internal controls literature by providing evidence on audit committee influence over firms' internal control decisions and related financial reporting outcomes. JEL Classifications: M41; M42; M48. Data Availability: The data are publicly available from the sources identified in the paper.

The Audit Committee: Management Watchdog or Personal Friend of the CEO?

2013 ◽  
Vol 89 (1) ◽  
pp. 113-145 ◽  
Author(s):  
Liesbeth Bruynseels ◽  
Eddy Cardinaels
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Social Ties ◽  
Data Availability ◽  
Audit Committees ◽  
Sarbanes Oxley ◽  
Negative Effect

ABSTRACT To ensure that audit committees provide sufficient oversight over the auditing process and quality of financial reporting, legislators have imposed stricter requirements on the independence of audit committee members. Although many audit committees appear to be “fully” independent, anecdotal evidence suggests that CEOs often appoint directors from their social networks. Based on a 2004 to 2008 sample of U.S.-listed companies after the Sarbanes-Oxley Act, we find that these social ties have a negative effect on variables that proxy for oversight quality. In particular, we find that firms whose audit committees have “friendship” ties to the CEO purchase fewer audit services and engage more in earnings management. Auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present. On the other hand, social ties formed through “advice networks” do not seem to hamper the quality of audit committee oversight. Data Availability: All data are publicly available from sources identified 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.

How Effective are Organizations' Internal Controls? Insights into Specific Internal Control Elements

2012 ◽  
Vol 6 (1) ◽  
pp. A31-A50 ◽  
Author(s):  
Dana R. Hermanson ◽  
Jason L. Smith ◽  
Nathaniel M. Stephens
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Component Level ◽  
Public Companies ◽  
Tone At The Top ◽  
Survey Responses

SUMMARY Based on survey responses from approximately 500 Chief Audit Executives (CAEs) and other internal auditors, this article provides an insider's view of the perceived strength of organizations' internal controls (i.e., internal control over financial reporting) in the Control Environment, Risk Assessment, and Monitoring components of the Committee of Sponsoring Organizations' (COSO 1992a) Internal Control—Integrated Framework. Although the respondents largely rate control strength as relatively high, we identify several areas for potential improvement of internal controls, especially related to assessing the “tone at the top,” as well as following up on deviations from policy and management override of controls. In analyzing individual control elements, we find that public companies' controls are consistently rated as more effective than those of other organizations. We also find a number of interesting differences across key industries, especially in the Monitoring component, where banks and other financial services firms appear to have more robust Monitoring controls than do healthcare and other services firms. The component-level analysis reveals that internal control component strength is positively related to the CAE reporting primarily to the audit committee, public company status, and the average tenure of the internal audit function staff, among other findings. Based on the survey findings, we describe key implications relevant to internal and external auditors, accounting researchers and educators, and management.

scholarly journals The Audit Committee’s Role Regarding the Provisions of The Foreign Corrupt Practices Act

1970 ◽  
Vol 12 (1) ◽  
pp. 23-35
Author(s):  
Alan Reinstein ◽  
Albert Spalding Jr.
Keyword(s):  
New York ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Stock Exchange ◽  
Codes Of Conduct ◽  
Audit Committees ◽  
Foreign Corrupt Practices Act ◽  
Corporate Codes Of Conduct ◽  
Foreign Commerce

The Foreign Corrupt Practices Act (FCPA) of 1977, as amended in 1988, prohibits individuals and corporations from using bribes and kickbacks to enhance foreign commerce. Imposing stiff penalties for noncompliance, the FCPA includes internal control and accounting and recordkeeping provisions. Several studies show that corporate codes of conduct and other formal ethical policies help assure compliance with ethical policies, including the provision of the FCPA. Congress, the Securities and Exchange Commission (SEC), the courts, the American Institute of Certified Public Accountants (A/CPA), and many other financial statement users and preparers have endorsed the audit committee concept as a means to oversee the audit function and otherwise strengthen the financial reporting process. As such, audit committees should ascertain the effectiveness of the entity's internal control structure and compliance with the provisions of the FCPA. After highlighting the provisions of the FCPA, this study examines the extent of the audit committees' involvement in corporate compliance with the FCPA-focusing on corporate codes of conduct-based on a study of 152 audit committees whose securities are traded on the New York Stock Exchange (NYSE). Recommendations for strengthening the committees' and companies' roles in this area are also presented.

SOX 404(b) Audits: Evidence from Auditing the Financial Close Process of the Accounting System

2019 ◽  
Vol 34 (3) ◽  
pp. 77-103
Author(s):  
Diane J. Janvrin ◽  
Maureen Francis Mascha ◽  
Melvin A. Lamboy-Ruiz
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Accounting System ◽  
Audit Process ◽  
Financial Statement Audit ◽  
Multiple Method ◽  
Access Controls

ABSTRACT Auditing Standard No. 5 requires that auditors integrate their evaluation of large issuers' internal control over financial reporting (ICFR) into their financial statement audit process, but the PCAOB warns that auditors may not adequately test related manual and systems internal controls. We use a multiple method approach to examine how auditors evaluate one important component of ICFR, the financial close process, and whether they evaluate it differently when conducting a SOX 404(b) integrated versus a financial statement audit. Interviewees relied heavily on walkthroughs, and tended to perform only cursory reviews of entity-level controls related to the financial close process. In addition, they often failed to test the link between the general ledger and supporting systems, including evaluating related access controls. Financial statement-only auditors were more likely to re-perform key controls than rely on cursory walkthroughs. Auditors performing integrated audits appeared to over-rely on ICFR findings when conducting financial statement audits. Data Availability: Interview data are available from the first author. PCAOB inspection reports are publicly available.

The Implications of the Audit Committee in the Financial Reporting of the Entities Listed on the Bucharest Stock Exchange

2021 ◽  
Vol 19 (161) ◽  
pp. 156-171
Author(s):  
Alin-Constantin DUMITRESCU ◽  
◽  
Ovidiu-Constantin BUNGET ◽  
Valentin BURCA ◽  
Oana BOGDAN ◽  
...  
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Econometric Model ◽  
Stock Exchange ◽  
Audit Committees ◽  
Decision Making Process ◽  
Policies And Procedures ◽  
Over Time

Over time social and economic events have reflected that the role of supervisory committees and especially of audit committees within entities is essential for ensuring sustainable development, increasing transparency and confidence. The purpose of the paper is to study the role of the audit committee in the financial reporting process of the companies listed on the Bucharest Stock Exchange in the period 2015-2019. The proposed econometric model shows that the management of the entity is oriented towards reducing deficiencies and non-compliances with internal policies and procedures, giving internal control a central role in the decision-making process.

The Impact on Auditor Judgments of CEO Influence on Audit Committee Independence

2011 ◽  
Vol 30 (4) ◽  
pp. 129-147 ◽  
Author(s):  
Jeffrey R. Cohen ◽  
Lisa Milici Gaynor ◽  
Ganesh Krishnamoorthy ◽  
Arnold M. Wright
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Data Availability ◽  
Audit Committees ◽  
Undue Influence ◽  
Management Incentives ◽  
Auditor Judgments ◽  
The Impact ◽  
Selection Of

SUMMARY Despite the importance of audit committee independence in ensuring the integrity of the financial reporting process, recent research suggests that even when audit committees meet regulatory independence requirements, certain factors, such as undue influence by the CEO over the selection of the audit committee, may diminish the ability of its members to be substantively independent. This study investigates whether auditors consider CEO influence over audit committee independence when making audit judgments where management's incentives to manage earnings differ. In an experiment, we find that audit partners and managers waive a larger amount of a proposed audit adjustment when management's incentives for earnings management are low than when incentives are high. However, when management incentives are high, auditors are less likely to waive as much of an adjustment when the CEO has less influence over the audit committee's independence than when the CEO's influence is greater. In all, the results support our expectations that auditors consider CEO influence on audit committee independence in the resolution of contentious accounting issues. Data Availability: Contact the authors.

scholarly journals Sustaining competitive advantage through good governance and fiscal controls: Risk determinants in internal controls

2020 ◽  
Vol 18 (1) ◽  
pp. 34-46
Author(s):  
Md. Jahidur Rahman ◽  
Rob Kim Marjerison
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Rapid Growth ◽  
Audit Committee ◽  
Good Governance ◽  
Geographic Distance ◽  
Negative Relationship ◽  
Internal Controls ◽  
Future Research ◽  
The Board Of Directors

This study conducts a comprehensive review of the literature published during 1989-2020 to identify the factors that can cause internal control weakness. This review is organized around five main groups, namely: 1) rapid growth and restructuring, 2) financial reporting complexity, 3) auditor tenure, 4) cultural differences, and 5) corporate governance. We perform an integrated literature review approach. Among the several factors found, some factors (the proportion of managerial ownership, Individualism, power distance, financial reporting complexity, rapid growth, and auditor-customer geographic distance) have a positive relationship with internal control weakness while others (the quality of the board of directors and auditing committees, directors’ compensation, and uncertainty avoidance) have a negative relationship. The findings contribute to future research by examining the factors that can cause internal control weakness from different perspectives, which will prove to be useful for investors, auditors, audit committee members, managers, and other stakeholders regarding the prevention of internal controls weaknesses through the application of solid internal controls as well as a path towards the improvement of existing problems of internal control weakness.

The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting

2019 ◽  
Vol 95 (5) ◽  
pp. 23-56 ◽  
Author(s):  
Musaib Ashraf ◽  
Paul N. Michas ◽  
Dan Russomanno
Keyword(s):  
Information Technology ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Audit Committee ◽  
Data Availability ◽  
Audit Committees ◽  
Material Weaknesses ◽  
Other Information ◽  
High Quality Information ◽  
The Impact

ABSTRACT We examine whether information technology expertise on audit committees impacts the reliability and timeliness of financial reporting. We find a reduction in the likelihood of material restatement, a reduction in the likelihood of information technology-related material weaknesses (which account for 55 percent of all reported material weaknesses), and more timely earnings announcements at firms with audit committee information technology expertise. These findings are robust to controlling for a firm's other information technology attributes, as well as when using entropy balanced samples, and we mitigate endogeneity concerns with evidence that our findings hold in a subsample of firms that all possess overall high-quality information technology. Finally, a difference-in-differences analysis, inclusion of firm fixed effects, and a falsification test largely support our assertion that the quality of financial reporting is significantly improved by the presence of an audit committee information technology expert. JEL Classifications: M41; M15. Data Availability: All data used in the study are publicly available.

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.

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