scholarly journals Effects of CEO Turnover and Board Composition Reform on Improvements in the Internal Control Quality

2018 ◽  
Vol 9 (3) ◽  
pp. 36
Author(s):  
Hiroshi Uemura
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Chief Executive ◽  
Audit Fees ◽  
Internal Controls ◽  
Board Independence ◽  
Accounting Fraud ◽  
Outside Directors ◽  
The Government

Several serious accounting scandals have occurred in Japan in recent years (e.g., Olympus); however, the government, regulators, and auditing standard setters have struggled to identify new directions for corporate governance in listed companies, such as standard setting to address risks of fraud in an audit or the adoption of new corporate governance codes. The validity and effectiveness of monitoring by outside directors have received criticism within such a context. Nevertheless, in 2015, accounting fraud at Toshiba was discovered, which surprisingly involved upper management; the outside directors had failed to detect and prevent this fraud. Again, the monitoring function of the Japanese board of directors and outside directors was viewed with suspicion. Thus, this study examines Japanese corporations that disclose significant deficiencies (SDs) in internal controls over financial reporting (ICFR) and determines whether replacing the chief executive officer (CEO) and enhancing board members’ independence and financial expertise are followed by SD remediation. The results indicate that Japanese companies that disclose SDs in ICFR are more likely to replace their CEOs and enhance board independence. In addition, this study finds that although these actions do not affect SD remediation, upgrading the board’s accounting expertise does correlate positively with SD remediation. Moreover, if a company remediates a SD by increasing the number of accounting experts on the board, an increase in audit fees during the following term can be mitigated. These findings should be of interest to Japan’s regulators, auditing standard setters, and financial statement users when considering improvements in the quality of internal controls. In particular, these individuals must realize that the control environment is not improved in Japanese firms merely by replacing the CEO and increasing board independence, particularly because new CEOs encounter difficulties in changing the environment established by their predecessors.

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

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).

scholarly journals Creative Accounting Practices at Satyam Computers Limited: A Case Study of India’s Enron

2016 ◽  
Vol 6 (6) ◽  
pp. 24 ◽  
Author(s):  
Madan Lal Bhasin
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Lessons Learned ◽  
Audit Committees ◽  
Board Members ◽  
Accounting Fraud ◽  
Creative Accounting ◽  
Depth Analysis ◽  
The Government

<p>Satyam Computers were once the crown jewel of Indian IT industry, however, the debacle of Satyam raised a debate about the role of CEO in driving a company to the heights of success and its relation with the board members and core committees. The scam brought to the light the role of corporate governance (CG) in shaping the protocols related to the working of audit committees and duties of board members. The Satyam scam was a jolt to the market, especially to Satyam stockholders.  This paper attempts an in-depth analysis of India’s Enron, Satyam Computer’s “creative-accounting” scandal. In public companies, this type of ‘creative’ accounting leading to fraud and investigations are, therefore, launched by the various governmental oversight agencies. The accounting fraud committed by the founders of Satyam in 2009 is a testament to the fact that “the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.” Scandals have proved that “there is an urgent need for good conduct based on strong corporate governance, ethics and accounting &amp; auditing standards.” The Satyam scandal highlights the importance of securities laws and CG in emerging markets. Indeed, Satyam fraud “spurred the government of India to tighten the CG norms to prevent recurrence of similar frauds in future.” Thus, major financial reporting frauds need to be studied for ‘lessons-learned’ and ‘strategies-to-follow’ to reduce the incidents of such frauds in the future. The increasing rate of white-collar crimes “demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit.”</p><h2> </h2>

Audit Fees after Remediation of Internal Control Weaknesses

2011 ◽  
Vol 25 (1) ◽  
pp. 87-105 ◽  
Author(s):  
Vishal Munsif ◽  
K. Raghunandan ◽  
Dasaratha V. Rama ◽  
Meghna Singhvi
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Future Research ◽  
First Year ◽  
Section 404 ◽  
The Third ◽  
Material Weaknesses ◽  
Audit Fee

SYNOPSIS: In this study, we examine audit fees for SEC registrants that remediate previously disclosed material weaknesses in internal control. We find that remediating firms have lower audit fees when compared to firms that continue to report material weaknesses in internal control. However, the remediating firms continue to pay, in the year of remediation as well as one and two years subsequent to remediation, a significant audit fee premium compared to firms that have clean Section 404 reports in each of the first four years. Firms that had an adverse Section 404 report only in the first year, but remediated the problems in year two and had clean Section 404 reports in years three and four, pay an audit fee premium of 32 (21) percent in the third (fourth) year when compared to firms that had clean Section 404 reports in each of the first four years. The results, thus, suggest that audit fees are “sticky” for firms that have material weaknesses in internal controls over financial reporting, and suggest some interesting questions for future research.

The incidence of accounting fraud is increasing: is it a matter of the gender of chief financial officers?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Endah Tri Wahyuningtyas ◽  
Aisyaturrahmi Aisyaturrahmi
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Gender Diversity ◽  
Chief Executive ◽  
Chief Financial Officers ◽  
Governance Mechanism ◽  
Accounting Fraud ◽  
Content Type ◽  
Negatively Associated ◽  
The Relationship

Purpose The purpose of this paper is to examine the association between accounting fraud and the gender of chief financial officers (CFOs). Design/methodology/approach This study uses a sample of US-listed firms for the period from 2000 to 2010. This paper takes this distribution of the sample observations because firms sanctioned by the Securities and Exchange Commission as reported in Accounting and Auditing Enforcement Releases for fraud are more heavily weighted in the 2000 to 2010 period. Findings This study provides considerable evidence to suggest that firms with female CFOs are negatively associated with accounting fraud. The study also suggests that in state-owned enterprises, in which political concerns are likely to be more pronounced, the relationship between female CFOs and accounting fraud is negatively less significant. This study conducts an additional test about when and why boards’ diversity reduces accounting fraud or concerns. The result shows that the structure of gender-mixed boards is better than male-only boards. Therefore, it is important to control the activities or decisions of powerful chief executive officers. Research limitations/implications In general, the findings contribute to the current discussion on the necessity of increasing gender diversity as a corporate governance mechanism. This study is specifically focussed on CFOs that may directly have important implications for financial reporting and corporate governance. Originality/value This paper extends prior research by addressing the potential effects of female CFOs on accounting fraud. For example, Zhou et al. (2018) examine the relationship between executive compensation and the incidence of corporate fraud in Chinese listed companies from the perspective of delisting pressure. The result documents that there is no a relationship between CFO gender and accounting fraud. The results, however, find that female CFOs are negatively associated with accounting fraud; meaning that the presence of female CFOs brings positive implications for financial reporting and corporate governance.

The Severity of Internal Controls over Financial Reporting Deficiencies: Differences among Types and Industries

2014 ◽  
pp. 55-77
Author(s):  
Tatiana Mazza ◽  
Stefano Azzali
Keyword(s):  
Information Technology ◽  
Financial Reporting ◽  
Internal Control ◽  
Service Industry ◽  
Listed Companies ◽  
Internal Controls ◽  
Service Companies ◽  
Finance Industry ◽  
Material Weaknesses ◽  
Fixed Assets

This study analyzes the severity of Internal Control over Financial Reporting deficiencies (Deficiencies, Significant Deficiencies and Material Weaknesses) in a sample of Italian listed companies, in the period 2007- 2012. Using proprietary data the severity of the deficiencies is tested for account-specific, entity level and information technology controls and for industries (manufacturing and services vs finance industries). The results on ICD severity is compared with one of the most frequent ICD (Acc_Period End/Accounting Policies): for account-specific, ICD in revenues, purchase, fixed assets and intangible, loans and insurance are more severe while ICD in Inventory are less severe. Differences in ICD severity have been found in the characteristic account: ICD in loan and insurance for finance industry and ICD in revenue, purchase for manufacturing and service industry are more severe. Finally, we found that ICD in entity level and information technology controls are less severe than account specific ICD in all industries. However, the results on entity level and information technology deficiencies could also mean that the importance of these types of control are under-evaluated by the manufacturing and service companies.

Enriching AIS Courses With SOX Compliance Activities

2010 ◽  
Vol 5 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Joann Segovia ◽  
Carol M. Jessup ◽  
Marsha Weber ◽  
Sheri Erickson
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Controls ◽  
Accounting Profession ◽  
Investor Confidence ◽  
Reporting Requirements ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Significant Change

A very significant change to the accounting profession occurred in 2002 when the Sarbanes-Oxley Act of 2002 (SOX) was enacted. This legislation had a significant impact on corporations and their audit firms. The objective was to improve corporate governance and its quality of financial reporting to improve investor confidence. This paper provides instructors with a background on SOX and suggests readings and activities that reflect the requirements of SOX as it relates to the AIS environment and the analysis of internal controls. These activities can strengthen students' understandings of how corporations respond to the various reporting requirements of this Act.

CEO Financial Background and Audit Pricing

2016 ◽  
Vol 30 (3) ◽  
pp. 325-339 ◽  
Author(s):  
Rachana Kalelkar ◽  
Sarfraz Khan
Keyword(s):  
Financial Reporting ◽  
Chief Executive Officers ◽  
Work Experience ◽  
Audit Committee ◽  
Reporting Quality ◽  
Chief Executive ◽  
Audit Fees ◽  
Fixed Effect Model ◽  
Audit Pricing ◽  
Advantages And Disadvantages

SYNOPSIS Accounting scholars theorize that audit price is a function of a client's audit and business risk. Existing research finds that the functional expertise of Chief Executive Officers (CEOs) in finance improves financial reporting quality (Matsunaga, Wang, and Yeung 2013), increases profitability, and reduces the likelihood of firm failure (Custodio and Metzger 2014). These factors suggest that auditors' engagement risk decreases when incumbent CEOs possess financial expertise, raising the likelihood that auditors will charge these firms lower fees. In this study, we examine whether CEOs' work experience in accounting- and finance-related jobs affects audit fees. Using a panel of U.S. firms between 2004 and 2013, we find that firms that have a financial expert CEO pay lower audit fees. Our results are robust to various specifications, including firm-fixed effect model and specifications that control for other CEO- and Chief Financial Officer (CFO)-specific and audit committee characteristics. Our findings thus add to the literature on the advantages and disadvantages of a functional background of top managers and how this background can create value for a firm through savings in audit fees.

Board Independence and Internal Control Weakness: Evidence from SOX 404 Disclosures

2016 ◽  
Vol 36 (2) ◽  
pp. 45-62 ◽  
Author(s):  
Yangyang Chen ◽  
W. Robert Knechel ◽  
Vijaya Bhaskar Marisetty ◽  
Cameron Truong ◽  
Madhu Veeraraghavan
Keyword(s):  
Internal Control ◽  
Internal Controls ◽  
Board Independence ◽  
Negative Relation ◽  
Internal Control Weaknesses ◽  
A Company ◽  
Jel Classifications

SUMMARY In this paper, we investigate whether board independence has an impact on the likelihood that a company reports weaknesses in internal controls. Using a sample of 11,226 firm-year observations spanning the period 2004–2012, we establish several findings. First, we document a negative relation between board independence and the disclosure of internal control weaknesses. We also document that the negative relation is stronger for firms with unitary leadership (combined positions of CEO and chairman) than for firms with dual leadership. Next, we show that board independence is associated with both fewer account-specific and company-level weaknesses. Finally, we show that board independence is associated with timely remediation of internal control weaknesses and that the implementation of Auditing Standard No. 5 in 2007 weakens the effect of board independence on the disclosure of ICW. JEL Classifications: G10; G18.

Board structure changes after accounting fraud: the case of Schneider Electric

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Benedicte Millet-Reyes ◽  
Nancy Uddin
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Multinational Corporation ◽  
Business Case ◽  
Annual Reports ◽  
Board Structure ◽  
Control Mechanisms ◽  
Accounting Fraud ◽  
Content Type ◽  
The Impact

Theoretical basis The impact of corporate governance on internal controls and quality of financial disclosures. Research methodology Analysis of a real financial fraud event for a non-US multinational corporation. The case relies on accessing and analyzing annual reports for the firm, both before and after the fraud. Additional information on industry governance characteristics are provided in the case itself so that students can compare the firm to the industry. Case overview/synopsis This business case is centered on the analysis of Schneider Electric, a French multinational corporation, which had to restate their financial statements in 2011 because of accounting fraud. Following this event, Schneider undertook major changes in their board structure to improve internal control mechanisms. This pedagogical business case familiarizes students with international differences in ownership and board structure and emphasizes potential corporate governance changes after financial statement fraud. Complexity academic level Managerial finance, corporate finance, international finance, auditing. This case is more appropriate for upper-level undergraduate and graduate courses.

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