scholarly journals Internal Control Weakness and Managerial Myopia: Evidence from SOX Section 404 Disclosures

2019 ◽  
Vol 8 (1) ◽  
pp. 71-83 ◽  
Author(s):  
Amy E. Ji
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Investment Decisions ◽  
Reporting Quality ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Section 404 ◽  
Managerial Myopia ◽  
Internal Control Weaknesses ◽  
The Impact

Problem/ Relevance: Managerial myopia is an important issue of interests to academics, practitioners, and regulators as managers have been condemned for their obsession with short-term earnings and myopic investment decisions that sacrifice firms’ long term value for shareholders. This article contributes by examining whether the quality of firms’ internal controls over financial reporting (ICFR) is associated with managerial myopia. Research Objective/ Questions: The purpose of this study is to examine whether managers in firms reporting material internal control weaknesses (ICW) under Section 404 of the Sarbanes-Oxley Act (SOX) of 2002 engage in myopic behaviors more than those in firms without reporting ICW. Methodology: The study uses the logit regression model to investigate a sample obtained from Compustat for the period of 2005-2013. Major Findings: The study finds a positive association between internal control weaknesses reported by auditors under Section 404 of the SOX and managerial short-termism which is measured by the probability of cutting R&D expenses in the current year from the previous year. Implications: Whereas prior studies mostly examine the impact of internal controls on accounting quality, this study demonstrates the implication of internal controls beyond financial reporting quality by showing an association between internal control quality and managerial myopia. Future research may further investigate the association between firms’ financial reporting quality and managerial investment decisions.

The impact of high insider ownership on SOX 404 internal controls

2019 ◽  
Vol 20 (1) ◽  
pp. 106-122
Author(s):  
Lucy Uche Diala ◽  
Robert Houmes
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Internal Controls ◽  
Section 404 ◽  
Probit Regression ◽  
Content Type ◽  
Insider Ownership ◽  
Ex Post ◽  
The Impact

Purpose This study aims to investigate the effect of high insider ownership on firms’ internal controls over financial reporting. In particular, it examines how high insider ownership affects the likelihood of an adverse Sarbanes–Oxley Act Section (SOX Section 404) opinion and its subsequent remediation. Design/methodology/approach Tests of hypotheses use ineffective controls and remediation models. The initial tests in this study use ineffective internal controls over financial reporting probit regression models to investigate how high insider ownership affects the ex-post likelihood of an adverse 404 opinion. Two remediation models – a multinominal probit regression and probit regression model – are used to investigate the effect of high insider ownership on the likelihood of successfully remediating an adverse 404 opinion. Findings Results show that while the ex-ante likelihood of an adverse SOX Section 404 auditor’s internal control opinion increases with high insider ownership, high insider ownership firms are more likely to remediate ineffective 404 controls. This study rationalizes these diverse findings by asserting that prior to an adverse 404 opinion, entrenched managers avoid internal control financial reporting oversight and monitoring. After an adverse opinion, however, and within the context of an imminent and explicit value reducing 404 opinion, powerful high insider owner managers are motivated to remedy ineffective controls. Originality/value This research synthesizes existing streams of literature on insider ownership and the effectiveness of internal control over financial reporting quality to provide new information on the effects of high insider ownership on firms’ internal controls.

scholarly journals Assessment of Government Internal Control Systems on Financial Reporting Quality in Ghana: A Case Study of Ghana Revenue Authority

2018 ◽  
Vol 10 (11) ◽  
pp. 40
Author(s):  
Wonder Agbenyo ◽  
Yuansheng Jiang ◽  
Prince Komla Cobblah
Keyword(s):  
Control Systems ◽  
Financial Reporting ◽  
Internal Control ◽  
Negative Impact ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Quality Reporting ◽  
The Impact

Internal control systems cannot be underestimated as it serves as the lifeblood of most institutions in terms of its imperative roles that it plays in both tangible and intangible assets of an organization. Internal control actions on quality financial report state positive goals more especially when all parties involved adhere to their duties; thus, making the quality of financial reporting comparable, understandable, relevant, and reliable. In this regard, this study investigated the impact of government internal control systems on financial reporting quality in Ghana using Ghana Revenue Authority as the case study. Specifically, the study examined the nature and quality of financial reporting and the impact of government internal control systems on financial reporting quality. Both quota and simple random sampling techniques were used to select fifty (50) persons as the sample size of the study. Questionnaires were used to obtain data. The correlation matrix was used to examine the relationship between government internal control systems and financial reporting quality. The study finds out that contrary to apriori expectation sign monitoring as an element of internal control system has a negative impact on the financial quality reporting but was however statistically significant. The study also revealed that with a unit increase in the collection performance, the financial reporting quality of GRA will improve. The study recommended that the government should ensure that the internal control systems are well monitored and regulated. 

scholarly journals Does Control Self-Assessment Influence Financial Reporting Quality?

2020 ◽  
Vol 5 (4) ◽  
pp. 70-76
Author(s):  
Hiroshi Uemura
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
Self Assessment ◽  
Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

Social Capital and Internal Control Material Weaknesses

2021 ◽  
Author(s):  
Jayanthi Krishnan ◽  
Sang Mook Lee ◽  
Myungsoo Son ◽  
Hakjoon Song
Keyword(s):  
Social Capital ◽  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
External Monitoring ◽  
Regional Center ◽  
Material Weaknesses ◽  
Specific Material

Using a measure of social capital provided by the Northeast Regional Center for Rural Development, we document that, after controlling for auditor effort, firms headquartered in US counties with higher social capital are less likely to have ineffective internal control over financial reporting than those located in regions with lower social capital. This negative association between local social capital and ineffective internal controls holds when other forms of external monitoring are weak. We also find that the association is driven by ineffective internal control arising from entity-level, but not from account-specific, material weaknesses. Overall, we contribute to the literature that links firms' social environment with financial reporting quality.

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 Impact of auditors and internal control effectiveness on the financial reporting quality in small and medium-sized enterprises in Vietnam

2020 ◽  
Vol 4 (2) ◽  
pp. First
Author(s):  
Pham Quoc Thuan
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Weighted Average ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Measurement Scale ◽  
Survey Method ◽  
Control Effectiveness ◽  
Big 4 ◽  
The Impact

This study aims to determine the impact of auditors (Big 4 and non-big 4) and internal control effectiveness on the financial reporting quality in Small and medium-sized enterprises in Vietnam. The case study reasearch with participants who are in the following positions: Head of finance and accounting department; General manager/director; Internal control manager; Auditors is used to build and complete the measurement scale of financial reporting quality based on viewpoints of FASB and IASB 2018. Weighted average is applied for the elements of information quality in measuring financial reporting quality. By using the survey method with a sample of 183 respondents from small and medium - sized enterprises in Vietnam, the authors have developed a regression model showing the impact of these factors named: Auditors (Big 4 and Non-big 4) and Internal Control Effectiveness to the financial reporting quality. In which, the differences in the influence of Big 4 and Non-Big 4 on the quality of financial statements information is the highlighted contributions of this study. In terms of financial reporting quality, the survey results show that financial reporting quality in small and medium - sized enterprises in Vietnam is considered acceptable with average point being 3.49/5. Among 3 qualitative characteristics of financial reporting quality, the enhancing characteristics are highly evaluated (3.94/5) while the fundamental characteristics (relevance and faithful presentation) are considered as moderate (3.43/5 and 3.31/5).

scholarly journals The Influence of Internal Controls on Public Financial Reporting Quality (PFRQ) in Sri Lanka; an Empirical Study

2021 ◽  
Vol 06 (07) ◽  
Author(s):  
Anuruddha, M.S. ◽  
Keyword(s):  
Sri Lanka ◽  
Financial Reporting ◽  
Central Government ◽  
Good Governance ◽  
Reporting Quality ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
The Public ◽  
The Impact

Public financial reporting is accountable to maintain public trust by protecting the accountability, openness, and transparency of public money which leads to the good governance of the country. There were many criticisms over financial reporting quality by various stakeholders of entities across the countries. There is a growing concern over the quality of PFR which determines the level of performing expectations of financial reporting. Assurance of PFR in Sri Lanka has deteriorated and been questioned by legislative authorities and interested parties because of the quality concerns. Considering the scholarly studies in various countries, the study was carried out in Sri Lanka to investigate the influence of Internal Controls (ICs) over the Public Financial Reporting Quality (PFRQ) with an objective to measure and conclude the determinants. To conclude the impact, the study investigates the influence of five basic dimensions of ICs introduced in previous literature, namely: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring. Considering the facts of the context of Sri Lanka, the research has investigated the influence of IC on public financial reporting quality in the central government ministries and departments environment in Sri Lanka. The primary data was collected by a questionnaire survey conducted with accountants who are being employed in the central government ministries and departments in Sri Lanka. Data have collected by a structured questionnaire and verified by Cronbach’s alpha test for reliability. A multiple linear regression model was developed and tested to determine the statistical influence of variables of IC over the dependent PFRQ. The findings investigate and conclude the positively significant influence of IC on the PFRQ in the central government ministries and departments in Sri Lanka. Further, it was admitted the significant direct influence of IC attributes of Control Environment, Information and Communication and Monitoring to determine the PFRQ. Based on the facts, the study recommends the public sector in Sri Lanka to ensure the effectiveness of ICs in government institutions to improve and maintain the trust level of PFRQ.

Mandatory Internal Control Audits, Audit Adjustments, and Financial Reporting Quality: Evidence from China

2021 ◽  
Author(s):  
Clive Lennox ◽  
Xi Wu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Internal Control Weaknesses ◽  
Quality Evidence

This study examines whether audit adjustments are a mechanism that links the effect of mandatory internal control audits (MICAs) on financial reporting quality. We argue that the requirement for auditors to publicly disclose internal control weaknesses exacerbated auditor-client conflicts and that this resulted in auditors being less likely to detect (and correct) misstatements in their clients’ pre-audit financial statements. Consistent with this argument, we find significant reductions in audit adjustments following the staggered introduction of MICAs in the China setting. We find the reductions in audit adjustments are associated with significant increases in material misstatements following the introduction of MICAs. In contrast, we find that the introduction of MICAs led to a significant reduction in material misstatements among clients that did not experience reductions in audit adjustments. Overall, the two effects offset each other, which explains why financial reporting quality did not improve on average following the introduction of MICAs.

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.

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