scholarly journals Consequences of Weak Internal Controls Over Financial Reporting: Foreign versus U.S. Firms

2021 ◽  
Vol 28 (2) ◽  
pp. 34
Author(s):  
Kathleen M Bakarich ◽  
Devon Baranek
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Foreign Firms ◽  
Multivariate Techniques ◽  
Material Weakness ◽  
Market Reactions ◽  
Listed Firms ◽  
Going Concern ◽  
Stock Market Reaction ◽  
Debt Market

For a sample of both foreign cross-listed firms and U.S. firms that report material weaknesses in internal control over financial reporting (MWICFR) from 2007- 2016, we utilize event studies and multivariate techniques to examine if there are differential consequences of reporting MWICFR across the two groups. Specifically, we examine the reactions of the equity and debt markets, external auditors, and the firm’s governance. We find that after receiving an audit report with material weakness issues, foreign firms face a significantly more negative stock market reaction and decrease in credit ratings. These firms are more likely to receive a going-concern audit opinion than U.S. firms and are also significantly less likely to change their CEOs or CFOs. Additionally, we find that the strength of the home market regulatory environment mitigates the negative equity and debt market reactions for foreign firms. Lastly, we also find that the presence of foreign auditors for foreign firms alleviates audit market consequences, resulting in a lower likelihood of auditor resignations and going-concern audit opinions. This paper extends and complements the existing literature on cross-listed firms by documenting differences in the consequences for firms reporting weaknesses in ICFR and exploring the traits driving these differences.

The Impact of Going Concern on Financial Reporting Quality: Evidence from Vietnam

2018 ◽  
Vol 34 (3) ◽  
Author(s):  
Phung Anh Thu ◽  
Nguyen Vinh Khuong
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Viet Nam ◽  
Listed Firms ◽  
Going Concern ◽  
Debt Covenant

The investigation was conducted to contribute empirical evidence of the association between going concern and financial reporting quality of listed firms on the Vietnam stock market. Based on data from 279 companies listed on the HNX and HOSE exchanges in Vietnam for the period 2009-2015, the quantitative research. Results found that the relationship between the going concern and financial reporting quality of listed firms. Research results are significant for investors, regulators to the transparency of financial reporting information. Keywords Going concern, financial reporting quality, listed firms References Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5_suppl), 140S-154S.Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.Chen, Y., Chen, C., & Huang, S. (2010). An appraisal of financially distressed companies’ earnings management: Evidence from listed companies in China. Pacific Accounting Review, 22(1), 22–41Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77, 35-59.DeFond, M., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1), 145–176.DeFond, M.L., & Park, C.W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23(2), 115–139.Dichev, I., & Skinner, D. (2004). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.Đinh Thị Thu T., Nguyễn Vĩnh K. (2016). Tác động của hành vi điều chỉnh thu nhập đến khả năng hoạt động liên tục trong kế toán: Nghiên cứu thực nghiệm cho các doanh nghiệp niêm yết tại Việt Nam, Tạp chí phát triển khoa học và công nghệ, Quí 3, tr.96-108.Đỗ Thị Vân Trang (2015). Các mô hình đánh giá chất lượng báo cáo tài chính, Tạp chí chứng khoán Việt Nam, 200, tr 18-21.Habib, A., Uddin Bhuiyan, B., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324.Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), pp.57-81.Lu, J. (1999). An empirical study of earnings management by loss-making listed Chinese companies. KuaijiYanjiu (Accounting Research), (9), 25–35.McNichols, M.F. and Stubben, S.R., (2008). Does earnings management affect firms’ investment decisions?. The accounting review, 83(6), pp.1571-1603.Selahudin, N.F., Zakaria, N.B., & Sanusi, Z.M. (2014). Remodelling the earnings management with the appear- ance of leverage, financial distress and free cash flow: Malaysia and Thailand evidences. Journal of Applied Sciences, 14(21), 2644–2661.Skinner, D.J., & Sloan, R. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2/3), 289–312.Sweeney, A.P., (1994). Debt-covenant violations and managers' accounting responses. Journal of Accounting & Economics, 17(3): 281-308.Trần Thị Thùy Linh, Mai Hoàng Hạnh (2015). Chất lượng báo cáo tài chính và kỳ hạn nợ ảnh hưởng đến hiệu quả hoạt động của doanh nghiệp Việt Nam, Tạp chí phát triển kinh tế, 10, tr.27-50.Trương Thị Thùy Dương (2017). Nâng cao chất lượng báo cáo tài chính công ty đại chúng, Tạp chí tài chính, 1(3), tr.55-56.Uwuigbe, Ranti, Bernard, (2015). Assessment of the effects of firm’s characteristics on earnings management of listed firms in Nigeria, Asian Economic and Financial Review,5(2):218-228.

Audit Partner Evaluation of Compensating Controls: A Focus on Design Effectiveness and Extent of Auditor Testing

2010 ◽  
Vol 29 (2) ◽  
pp. 175-187 ◽  
Author(s):  
Audrey A. Gramling ◽  
Ed O’Donnell ◽  
Scott D. Vandervelde
Keyword(s):  
Risk Factors ◽  
Financial Reporting ◽  
Internal Control ◽  
Risk Information ◽  
Material Weakness ◽  
Halo Effects ◽  
Inherent Risk ◽  
Design Effectiveness ◽  
Overall Risk

SUMMARY: Prior research has shown that when auditors are aware of overall risk information from procedures performed earlier in the audit, halo effects in subsequent judgments result (e.g., O’Donnell and Schultz 2005). The purpose of this study is to examine whether such effects occur in the context of evaluating the effectiveness of a client’s internal control over financial reporting. We experimentally examine whether information about overall risks (i.e., existence of a material weakness unrelated to a compensating control being evaluated and level of overall inherent risk) influences audit partners’ judgments related to a compensating control that has been implemented within a specific client process. The judgments we examine include the (1) level of precision needed in a compensating control for it to be assessed as effectively designed, and (2) extent of evidence needed for auditor testing of the operating effectiveness of the control. Our results are based on responses from 90 audit partners. We find that the existence of a material weakness unrelated to a compensating control being evaluated results in partners preferring a more precise compensating control and requiring more auditor testing. Further, while prior research has demonstrated that knowledge of overall inherent risk factors results in halo effects, our results indicate that this knowledge does not influence partners’ judgments about a compensating control.

The Unintended Consequences of Internal Controls Reporting on Tax Decision Making

2019 ◽  
Vol 42 (1) ◽  
pp. 83-102
Author(s):  
Victoria J. Hansen
Keyword(s):  
Decision Making ◽  
Financial Reporting ◽  
Internal Control ◽  
Unintended Consequences ◽  
Internal Controls ◽  
Corporate Tax ◽  
Material Weakness ◽  
Reporting Requirements ◽  
Internal Control Deficiencies ◽  
The Impact

ABSTRACT This study investigates the impact of the internal controls over financial reporting requirements (ICFR) on the decision making of corporate tax executives. I examine tax executives' decisions to disclose an internal control deficiency by amending a prior year return when the internal control deficiency will be classified as either a significant deficiency or a material weakness. I also examine if tax executives' decisions are impacted by whether amending results in a refund or additional tax due. I find tax executives are less likely to disclose (amend) when the internal control deficiency is classified as a material weakness. When facing a material weakness, 16.7 percent choose not to disclose. Tax executives are also less likely to disclose (amend) when amending results in additional tax due. These results indicate the ICFR requirements may have unintended consequences. If executives do not disclose internal control deficiencies, the reliability of financial reporting is limited.

The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era

2006 ◽  
Vol 25 (2) ◽  
pp. 1-23 ◽  
Author(s):  
Michael L. Ettredge ◽  
Chan Li ◽  
Lili Sun
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Small Sample ◽  
Impact Factors ◽  
Section 404 ◽  
Material Weakness ◽  
Control Quality ◽  
Sarbanes Oxley ◽  
Specific Material ◽  
The Impact

This study analyzes the impact of internal control quality on audit delay following the implementation of the Sarbanes-Oxley Act (2002) (SOX). Unlike prior studies of audit delay that obtain information about internal control strength via surveys, or use fairly crude proxies for internal control quality, our study employs external auditor assessments of internal control over financial reporting (ICOFR) that are publicly disclosed in SEC 10-K filings under SOX Section 404. Thus, the empirical evidence provided in this study is both timely and reliable (i.e., not subject to small sample bias or weak proxies). Consistent with our expectation, we find that the presence of material weakness in ICOFR is associated with longer delays. The types of material weakness also matter. Compared to specific material weakness, general material weakness is associated with longer delays. Additional analyses indicate that companies with control problems in personnel, process and procedure, segregation of duties, and closing process experience longer delays. After controlling for other impact factors, this study also documents a significant increase in audit delay associated with the fulfillment of the SOX Section 404 ICOFR assessment requirement. This suggests that Section 404 assessments have made it more difficult for firms to comply with the SEC's desire to shorten 10-K filing deadlines. Our finding thus supports and helps explain the SEC's decisions in 2004 and 2005 to defer scheduled reductions in 10-K filing deadlines (from 75 days to 60 days) for large, accelerated filers.

SOX Section 404 Material Weakness Disclosures and Audit Fees

2006 ◽  
Vol 25 (1) ◽  
pp. 99-114 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Fiscal Year ◽  
Section 404 ◽  
Control Material ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

The Persistence in the Association between Section 404 Material Weaknesses and Financial Reporting Quality

2013 ◽  
Vol 33 (1) ◽  
pp. 93-116 ◽  
Author(s):  
Emma-Riikka Myllymäki
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Control Problems ◽  
Section 404 ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
History Of

SUMMARY This study examines whether Sarbanes-Oxley (SOX) Section 404 material weakness (MW404) disclosures are predictive of future financial reporting quality. I find evidence that for companies with a history of MW404s, the likelihood of misstatements in financial information continues to be significantly higher for two years after the last MW404 report compared to companies without a history of reported MW404s. The magnitude of the effect decreases non-linearly with decreasing speed. The findings further imply that the reason for the misstatement incidences is the unacknowledged pervasiveness of control problems. In particular, it appears that in many cases, the future misstatements are unrelated to the MW types disclosed in the last MW404 report, suggesting that some MW types are unacknowledged and, hence, control problems are even more pervasive than what was identified. Overall, the findings of this study highlight the importance of discovering and disclosing material weaknesses in internal control over financial reporting.

scholarly journals From Phishing To Advanced Persistent Threats: The Application Of Cybercrime Risk To The Enterprise Risk Management Model

2010 ◽  
Vol 14 (4) ◽  
Author(s):  
John W. Moore
Keyword(s):  
Risk Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Enterprise Risk Management ◽  
Management Model ◽  
Material Weakness ◽  
Public Companies ◽  
Advanced Persistent Threats ◽  
Sarbanes Oxley ◽  
Enterprise Risk

This paper examines the issues of cybercrime in the context of risk to organizations.  In particular, it considers the control frameworks most commonly used by U.S. public companies to benchmark their internal controls over financial reporting.  It discusses the market for stolen identities, looking at the sources from which many of those identities are stolen.  It reviews the available internal control frameworks and explains how a firm’s risk of cybercrime might be classified as a material weakness under Sarbanes-Oxley Section 404.  It models how the use of COSO’s Enterprise Risk Management model could improve an organization’s chances of avoiding a serious incident.

scholarly journals The impact of earnings management on going concern: Evidence from listed firms in Vietnam

2016 ◽  
Vol 19 (3) ◽  
pp. 96-108
Author(s):  
Thao Thi Thu Dinh ◽  
Khuong Vinh Nguyen
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Stock Markets ◽  
Quantitative Research ◽  
Correlation Relationship ◽  
Quantitative Research Methods ◽  
Listed Firms ◽  
Going Concern ◽  
The Impact

This study is to provide an empirical evidence about the correlation relationship between earnings management and the respect of going-concern of companies listed on Vietnam stock markets. Using quantitative research methods on data obtained from 80 companies delisted on Vietnam stock markets (HNX and HOSE) in the period from 2012 to 2015, we find a correlation between earnings management and going concern of the company. The study is meaningful to investors, management organizations and auditors in expressing their opinion about the ability of the going concern and enhances the transparency of financial reporting information.

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