Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation*

Johnstone, Karla M.; Li, Chan; Rupley, Kathleen Hertz

doi:10.1111/j.1911-3846.2010.01037.x

Cited by 230 publications

(155 citation statements)

References 41 publications

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“…Nevertheless, it was possible that market reactions and litigation risks associated with IC system weaknesses would be such that no public company would allow them to persist, once identified by an audit firm (even if company officials disagreed with the audit firm). Indeed, Hammersley et al (2007) However, Johnstone et al (2011) shows that many US public companies disclose persistent IC weaknesses. In the three years ending 2006, they found 733 US companies disclosed a material weakness.…”

Section: Sox's "Comply or Explain" Features In Operationmentioning

confidence: 99%

SOX after Ten Years: A Multidisciplinary Review

Coates

Srinivasan²

2013

SSRN Journal

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We review and assess research findings from 120+ papers in accounting, finance, and law to evaluate the impact of the Sarbanes-Oxley Act. We describe significant developments in how the Act was implemented and find that despite severe criticism, the Act and institutions it created have survived almost intact since enactment. We report survey findings from informed parties that suggest that the Act has produced financial reporting benefits. While the direct costs of the Act were substantial and fell disproportionately on smaller companies, costs have fallen over time and in response to changes in its implementation. Research about indirect costs such as loss of risk taking in the U.S. is inconclusive. The evidence for and social welfare implications of claimed effects such as fewer IPOs or loss of foreign listings are unclear. Financial reporting quality appears to have gone up after SOX but research on causal attribution is weak. On balance, research on the Act's net social welfare remains inconclusive. We end by outlining challenges facing research in this area, and propose an agenda for better modeling costs and benefits of financial regulation.

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Section: Sox's "Comply or Explain" Features In Operationmentioning

confidence: 99%

SOX after Ten Years: A Multidisciplinary Review

Coates

Srinivasan²

2013

SSRN Journal

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“…Prior research examining the consequences of material weaknesses in ICFR has focused on earnings quality (Doyle et al 2007a;AshbaughSkaife et al 2008;Gong et al 2009;Altamuro and Beatty 2010), cost of equity (Beneish et al 2008;Ashbaugh-Skaife et al 2009), cost of public and private debt (Costello and WittenbergMoerman 2011;Dhaliwal et al 2011;Kim et al 2011) the market reaction to internal control reports (Hammersley et al 2008), the effect on audit firms (Hogan and Wilkins 2008;Hoitash et al 2008) and CEO/CFO turnover (Johnstone et al 2010). We advance the ICFR literature in three ways.…”

Section: Introductionmentioning

confidence: 99%

Internal Control Over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading

2012

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This paper examines the association between ineffective internal control over financial reporting and the profitability of insider trading. We predict and find that the profitability of insider trading is significantly greater in firms disclosing material weaknesses in internal control relative to firms with effective control. The positive association is present in the years leading up to the disclosure of material weaknesses, but disappears after remediation of the internal control problems. We find insider trading profitability is even greater when insiders are more likely to act in their own self-interest as indicated by auditors' weak "tone at the top" adverse internal control opinions and this incremental profitability is driven by insider selling. Our research identifies aWe appreciate the helpful comments from the editor Michelle Hanlon, an anonymous reviewer, Steve Lin, Stefan Veith, participants at the 2010 AAA Annual Meeting and 2011 EAA Congress, and workshop participants at Erasmus University Rotterdam.2 new setting where shareholders are most at risk for wealth transfers via insider trading and highlights market consequences of weak "tone at the top".

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“…Research conducted by Goh and Li (2008) looked into this claim by comparing companies with material internal control weaknesses to companies without them. It was found in 733 organizations that disclosed material weaknesses that a majority of them (59%) remediated (Johnstone, Li & Rupley, 2011). Firms that remediate benefitted with a 151 point decrease in -the cost of equity .…”

Section: Introduction ⅰmentioning

confidence: 99%

A Review of the effects of Sarbanes‐Oxley on Stock Price

Boylan¹

2015

Glob Bus Financ Rev

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A B S T R A C TThe Sarbanes Oxley Act (SOX) has been in place for over a decade, and the effects of the legislation are widely -debated in the business community. The problem to be investigated is the impact of the Act on the disclosure of financial information and the strength of the internal controls a company has in place to determine whether SOX has affected publicly traded companies in the United States. SOX resulted in the creation of the Public Company Accounting Oversight Board and provides for the establishment of audit reporting standards and the investigation, inspection, and enforcement of public accounting firms. The Act has decreased the number of discretionary accruals, addressed the backdating of stock options, addressed material reporting weaknesses, and increased the quality of internal controls. Several significant factors support the assertion that the benefits of SOX outweigh the compliance costs of its implementation.

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Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation*

Cited by 230 publications

References 41 publications

SOX after Ten Years: A Multidisciplinary Review

SOX after Ten Years: A Multidisciplinary Review

Internal Control Over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading

A Review of the effects of Sarbanes‐Oxley on Stock Price

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