Search results

The purpose of this paper is to examine the association between pervasiveness, severity, and remediation of internal control material weakness (ICMW) reported by the SEC registrants pursuant to SOX Section 404 and audit fees.

The paper employs multivariate regression models for a sample of 854 firms that disclosed ICMW for the first time in 2004, 2005, or 2006, to investigate the empirical relationship of pervasiveness and severity of ICMW and its subsequent remediation with audit fees.

The analyses demonstrate that audit fees are significantly positively related to the severity (and pervasiveness) of ICMW in the years of ICMW disclosures and are significantly negatively related to the remediation of internal control weaknesses in the years when ICMW remediation took place. The test results further demonstrate that the remediation of systematic control weaknesses has a greater effect on reduction of audit fees compared to the remediation of nonsystematic (transaction/account related) control weaknesses, though the remediation of both systematic and nonsystematic control weaknesses is accompanied by audit fee declines.

The study produces evidence on pricing audit services by incumbent auditors in response to the severity of internal material control weaknesses and their remediation in subsequent fiscal periods. Its results shed light on certain new aspects of audit fee determinants in the post‐SOX period by virtue of their implications that the pervasiveness and severity of internal control problems induce auditors to make an upward fee adjustment while their remediation has a moderating effect on pricing audit services.

The study's finding is a useful addition to the existing fee literature and is relevant for the post‐SOX world which experienced a structural change in financial accounting and auditing environment.

In 2001, the US moved to regulate internal control reporting by management and auditors. While some jurisdictions have followed the lead of the US, many others have not. An important question, therefore, is the relevance of internal control to stakeholders. The more specific issue of the benefits of US-style regulation of internal control reporting is also topical. We review studies on the determinants of internal control quality and its economic consequences for stakeholders including investors, creditors, managers, auditors and financial analysts. We extend previous reviews by focusing on US studies published since 2013 as well as all non-US studies investigating IC quality including countries regulating IC disclosure as well as unregulated settings and both developed and developing economies. In doing so, we identify research questions where evidence remains mixed and new directions in which there are research opportunities.

Three main insights arise from our analysis. First, evidence on the economic consequences of internal control quality suggests that the quality of internal control can have a significant effect on decision making by users of financial information. Second, the results of research on the empirical association between ownership structure, certain board characteristics and internal control quality is generally mixed. Empirical evidence concerning the association between audit committee characteristics and internal control quality generally supports a positive and significant association. Finally, while studies in non-US jurisdictions are increasing, opportunities remain to explore the determinants and consequences of internal control in other jurisdictions. Our review provides evidence for policy makers of whether there are benefits from requiring management and auditors to report on internal control over financial reporting.

This paper aims to investigate whether the stock market reacts to presentation options available to auditors under AS 2 (providing separate financial statement audit and internal control over financial reporting [ICOFR] audit reports, or presenting a combined report with both audit opinions).

Drawing on psychology theory, the authors hypothesize that presenting material weaknesses in ICOFR with an unqualified financial statement audit in a combined report effectively dilutes the weight placed on the material weaknesses perceived by investors. The authors further hypothesize the presentation format effect to vary by type of material weaknesses since some material weaknesses are considered more serious than others. The authors examine ICOFR and audit reporting and cumulative abnormal return data from 2007 to 2017 using two-stage least squares regression analysis.

The results show that a combined report of ineffective ICOFR and unqualified financial statement audit reduces the negative impact of material weakness disclosures on stock price reactions, but only when the weaknesses involve more serious entity-wide controls, as opposed to controls over specific accounts.

The findings help inform preparers, auditors, regulators and investors about the potentially unintended consequences of reporting format choice.

The findings contribute to the literature on internal control disclosures by demonstrating that market reactions to these disclosures depend not only on the types of material weaknesses disclosed but also on their presentation format.

The complexity of computerized information systems increases the complexity of the external auditor's assessment of the reliability of a client's internal control systems. The purpose of this paper is to investigate the impact of weaknesses in IT related internal controls on the cost of a SOX 404 audit of internal controls over financial reporting.

The paper considers the impact on audit fees through three dimensions: percentage increase in audit fees; amount of change in audit fees per outstanding common share; and actual dollar amount of audit fees. Examination of first year reports by accelerated filers yields 131 companies with material IT‐control weaknesses. These 131 companies are matched with a similar set of companies with no reported material weaknesses, and for a subset of 54 from the 131 companies in which a good match could be identified, a set of companies having only material non‐IT‐based control weaknesses are compared.

As expected, substantial fee differentials were identified for companies reporting material IT‐based control weaknesses as compared to both companies without any material weaknesses and those companies with only non‐IT related material weaknesses.

Preliminary evidence in regard to the costs of SOX 404 compliance for stockholders is provided. The cost of SOX 404 compliance has often been cited in criticisms of SOX, yet the focus of SOX is not on corporate wealth, but rather on enhancing corporate governance to protect the interest of stockholders. The cost of SOX compliance across the number of reported outstanding common shares for the companies studied is factored. It is found that the increased cost of audit fees on a per share basis is higher for companies reporting IT material weaknesses.

Automating the task of identifying process weaknesses using process models is promising, as many organizations have to manage a large amount of process models. The purpose of this paper is to introduce a pattern-based approach for automatically detecting potential process weaknesses in semantic process models, thus supporting the task of business process improvement.

Based on design research, combined with a case study, the authors explore the design, application and evaluation of a pattern-based process weakness detection approach within the setting of a real-life case study in a German bank.

Business process weakness detection can be automated to a remarkable extent using pattern matching and a semantic business process modeling language. A case study provided evidence that such an approach highly supports business process analysts.

The presented approach is limited by the fact that not every potential process weakness detected by pattern matching is really a weakness but just gives the impression to be one. Hence, after detecting a weakness, analysts still have to decide on its authenticity.

Applying weakness patterns to semantic process models via pattern matching allows organizations to automatically and efficiently identify process improvement potentials. Hence, this research helps to avoid time- and resource-consuming manual analysis of process model landscapes.

The approach is not restricted to a single modeling language. Furthermore, by applying the pattern matching approach to a semantic modeling language, the authors avoid ambiguous search results. A case study proves the usefulness of the approach.

The implementation of compliance procedures associated with the Sarbanes‐Oxley Act of 2002 came at a great cost to most publicly‐traded firms, largely due to the internal control disclosures required by Section 404 of the Act. The purpose of this paper is to contribute to the inquiry on internal control effectiveness by examining the impact of the type (same or different) and number of internal control weaknesses on audit fees. The paper also examines whether firms that remediate continue to incur higher audit fees compared to firms that never disclosed a weakness.

The authors evaluate the impact of internal control weaknesses and their remediation on audit fees using ordinary least squares regression for 9,122 firm year observations (3,096 unique firms) over the time period 2004‐2007.

The authors find: an incremental impact on audit fees of additional material weakness disclosures; firms that report the same material weakness pay higher fees than firms reporting a different material weakness in consecutive years; and audit fees remain high one, two, and three years following remediation compared to a firm that never disclosed an internal control weakness.

In contrast with prior studies, the sample includes firms that remediated weaknesses, firms that failed to remediate weaknesses, and firms that did not have prior weaknesses. The results suggest that the failure to remediate has greater risk implications than new weaknesses and that material weaknesses are associated with higher audit fees several years after remediation.

The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act.

The research uses cumulative abnormal stock returns (CARs) as a proxy for investor reactions. Restatements and internal control reports are available on audit analytics. Multivariate regression analyses were used for testing.

Using a sample of restating firms whose original misstatements are linked to underlying internal control weaknesses, the research finds that cumulative abnormal returns for firms disclosing internal control weaknesses in a timely manner is negative in a three-day window around the restatement announcements. The finding indicates that restatements with early disclosure of internal control weaknesses provide more persuasive evidence of the ineffectiveness of a firm’s internal control over financial reporting, rather than early disclosure lowering the information asymmetry between a firm and investors.

This study employs CARs to examine the market reaction to restatements conditional on disclosure of internal control weaknesses.

Further study on reactions by creditors who have access to private information on firms could extend the implications of the finding.

The study contributes to the existing research by documenting that early disclosure of material weaknesses in internal control affects investors’ reactions to financial restatements.

Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002 required companies to report on the effectiveness of their internal controls over financial reporting. Auditors also must attest to, and report on, the assessment of the effectiveness of internal control over financial reporting made by the management of the company being audited. The purpose of this paper is to provide analyses of audit fee costs and material weaknesses reported for companies of different sizes after the effective date of Section 404 and suggest approaches to reduce SOX 404 compliance costs.

Quantitative analysis and deductive reasoning are used to evaluate audit costs associated with Section 404.

Audit fees have been increased substantially, particularly during the first year a company complied with Section 404, and have not been dropped substantially after the first year of compliance. Companies with sales of less than $1 billion reported significantly more material weaknesses than larger companies.

This paper documents audit costs after the SOX Section 404 effective date, the typical types of material weaknesses reported, the proportion of companies of different sizes reporting material weaknesses, and describes approaches to reduce compliance costs.

This study aims to identify characteristics of firms reporting multiple years of material weaknesses in internal control over financial reporting (MWICFR), labeled “Repeat Offenders”, and examine their characteristics and the types of material weaknesses they report using both broad and COSO-based classification schemes. The analysis compares these firms with firms reporting only one year of MWICFR and examines the differences between Repeat Offenders reporting consecutive and non-consecutive weaknesses.

Univariate and multivariate analyses were conducted on a sample of 1,793 firm-year observations, split into Repeat Offenders and non-Repeat Offenders, and collected from AuditAnalytics and Compustat from 2007 to 2015.

On average, 40% of adverse opinions in ICFR each year can be attributed to Repeat Offenders. Compared to one-time MWICFR firms, Repeat Offenders are significantly more likely to report general material weaknesses and, within the COSO framework, are significantly more likely to report issues with Segregation of Duties and Processes and Procedures. Repeat Offenders reporting consecutive years of MWICFR are significantly more likely to have general weaknesses than non-consecutive Repeat Offenders and are also significantly more likely to report issues with Segregation of Duties and Personnel.

Prior studies have examined unremediated ICFR issues in the periods immediately following SOX implementation. This study extends this literature with a longer, more current sample period, focusing on both broad and COSO-specific control issues, as well as examining consecutive and non-consecutive MWICFR and firms with more than two years of MWICFR.

This study underpins recent Securities and Exchange Commission and Public Company Accounting Oversight Board concerns regarding pervasive ICFR issues. This study identifies some of the characteristics of firms associated with weaker ICFR and pinpoints more specific areas within internal controls that frequently lead to adverse opinions.

Extant methods of product weakness detection usually depend on time-consuming questionnaire with high artificial involvement, so the efficiency and accuracy are not satisfied. The purpose of this paper is to propose an opinion-aware analytical framework – PRODWeakFinder – to expect to detect product weaknesses through sentiment analysis in an effective way.

PRODWeakFinder detects product weakness by considering both comparative and non-comparative evaluations in online reviews. For comparative evaluation, an aspect-oriented comparison network is built, and the authority is assessed for each node by network analysis. For non-comparative evaluation, sentiment score is calculated through sentiment analysis. The composite score of aspects is calculated by combing the two types of evaluations.

The experiments show that the comparative authority score and the non-comparative sentiment score are not highly correlated. It also shows that PRODWeakFinder outperforms the baseline methods in terms of accuracy.

Semantic-based method such as ontology are expected to be applied to identify the implicit features. Furthermore, besides PageRank, other sophisticated network algorithms such as HITS will be further employed to improve the framework.

The link-based network is more suitable for weakness detection than the weight-based network. PRODWeakFinder shows the potential on reducing overall costs of detecting product weaknesses for companies.

A quicker and more effective way would be possible for weakness detection, enabling to reduce product defects and improve product quality, and thus raising the overall social welfare.

An opinion-aware analytical framework is proposed to sentiment mining of online product reviews, which offer important implications regarding how to detect product weaknesses.