Misstatements and Internal Control over Operations and Compliance

This study examines whether the effectiveness of internal control over operations and compliance is associated with the likelihood of financial misstatements. Using a unique dataset from Taiwan, we find that the more deficiencies a company has in internal control over compliance, the greater the likelihood that the company’s financial statements will be restated in the future; indeed, severe misstatements are more likely for firms with more internal control deficiencies in compliance. However, we do not find a similar impact involving internal control over operations. As the literature contains little about internal control over operations and compliance, our study contributes by shedding light on the importance of control activities in operations and compliance in regard to the quality of financial reporting.

The Unintended Consequences of Internal Controls Reporting on Tax Decision Making

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 Noncompliance and Internal Control Deficiencies on Going Concern Audit Opinions and Viability of Nonprofit Charitable Organizations

This study investigates whether material noncompliance ( MNC) with laws and regulations and internal control deficiencies ( ICDs) in a nonprofit charitable organization (NPO) affect the likelihood that the NPO receives a going concern audit opinion ( GCO) and the viability of the NPO. I find that noncompliance and ICDs are positively associated with the likelihood that an NPO receives a GCO. The results also suggest that the entity-level ICDs increase auditors’ propensity to issue a GCO but ICDs that occur at the federal program level do not. The evidence from the survival analysis shows that only ICDs have significant influence on the viability of NPOs. The results of the survival analysis also show that GCO-receiving NPOs are more likely to discontinue operations than their financially distressed peers, indicating that either auditors are correct in issuing the GCOs or GCOs become self-fulfilling prophecies. Analyses of Type I/Type II misclassifications suggest that auditors make more Type I errors than Type II ones, and the accuracy of going concern decisions seems to vary by auditor type, sector, and time period. The overall findings of this study provide evidence of hidden costs of noncompliance and ICDs in NPOs, which can motivate regulators and the managers of NPOs to enhance NPOs’ governance to lower the probability of getting a GCO and improve the NPO’s sustainability.

A Comprehensive Analysis of Findings from Single Audits: The Implications of Auditee Type and Auditor Expertise

ABSTRACT Single audits provide critical accountability for federal grant awards. Our study comprehensively examines differences in single audit findings (related to both financial statements and major program compliance) by auditee type (state/local government and nonprofit) and across varying levels of auditor expertise. In a sample of 24,144 audit engagements over the period 2004 through 2010, nonprofit auditees report fewer internal control deficiencies than government auditees, but more instances of questioned costs related to major programs. Audits conducted by firms with lower single audit expertise are associated with fewer financial statement and major program compliance findings. The results by auditee type and auditor expertise are important to discussions of single audit quality.