Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal Control Weaknesses

Rice, Sarah; Weber, David P.; Wu, Biyu

doi:10.2139/ssrn.2239965

Cited by 21 publications

(34 citation statements)

References 12 publications

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“…In contrast, building on prior research (Rice et al. ), we find that even with ESs, less than half of restatements are preceded by a MW disclosure, although there is some univariate support that ESs are associated with more signaling of MW s in advance of restatement announcements. We also document that, even in the presence of ESs, auditors issue an excessive number of GC s to clients that subsequently survive (Carson et al.…”

Section: Resultssupporting

confidence: 54%

Do Clients’ Enterprise Systems Affect Audit Quality and Efficiency?

Pincus

Tian

Wellmeyer

et al. 2017

Contemporary Accting Res

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Enterprise systems (ESs) are widely used to support business processes along the enterprise value chain. It has been shown that ESs, by integrating business functions and making information about day‐to‐day activities available, enhance operational transparency and improve the internal information environment. However, while ES‐based business infrastructures can offer many benefits, their prevalence and increased complexity have also brought new challenges to external auditors. Motivated by the prominence of this issue for auditors and regulators and by the scarcity of research jointly examining ESs and auditors’ work, we investigate whether the presence and extent of client firms’ ES implementations are related to the quality and efficiency of auditors’ work. Using proprietary archival data on ES implementations and controlling for self‐selection, we find that ES implementation improves the quality and efficiency of current and future years’ audit work. Specifically, there are fewer restatements, a greater likelihood of auditors issuing going‐concern opinions to firms that do not survive, higher accruals‐based auditing quality, a lower likelihood of Form 10‐K filing delays, and generally lower audit fees. We further show that the benefits of ESs generally increase with the scope of implementation and are generally greater when the ES includes accounting and finance systems. Inconsistent with improvement in the quality of auditors’ work, we find no evidence that ESs help auditors identify material weaknesses in advance of restatement announcements and we find that, even in the presence of ESs, auditors issue an excessive number of going‐concern opinions to clients that survive.

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Section: Resultssupporting

confidence: 54%

Do Clients’ Enterprise Systems Affect Audit Quality and Efficiency?

Pincus

Tian

Wellmeyer

et al. 2017

Contemporary Accting Res

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show abstract

“…We also include an indicator variable, REVENUE , to control for the impact of revenue restatements, which have been found to elicit more negative impact on returns compared to other types of restatements (e.g., Rice et al., ). We include SEC to distinguish restatements that involve SEC investigations from other restatements as they might raise questions about managers’ and auditors’ integrity, thereby eventually triggering more adverse consequences for the firm.…”

Section: Methodsmentioning

confidence: 99%

“…In one related study, Rice, Weber, and Wu () examine the consequences of restatements (auditor turnover, SEC enforcement actions, and class‐action lawsuits) conditional on prior MW disclosures. In a working paper, Hogan, Lambert, and Schmidt () examine the effect of combined MW and restatement disclosures on the initiation and resolution of subsequent litigation.…”

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confidence: 99%

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Material weakness disclosures and restatement announcements: The joint and order effects

Sarath

Wans

2019

Business Fin & Account

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We examine differences in stock price, option volatility, and litigation reactions to restatement announcements that are associated with a material weakness (MW) disclosure. Contrasted with restatements that are not associated with any MW disclosure, our analyses reveal that firms that announce both a restatement and an associated MW experience significantly more negative market returns, greater implied volatility, and higher likelihood of class action lawsuits. Separating the restatements into timely reporters, where the MW precedes the restatement, and non‐timely reporters, where the MW is concurrent with or follows the restatement, we find that timely reporters experience more negative returns at the time of the restatement, relative to non‐timely reporters, suggesting that investors perceive the early MW disclosure to signal more pervasive control‐related problems. Interestingly, we find that timely and non‐timely reporters are equally likely to be sued, consistent with the argument that wrongdoing (through either a timely or non‐timely MW disclosure) provides stronger grounds for establishing scienter. However, timely reporters appear to secure more favorable litigation outcomes: they face higher likelihood of lawsuit dismissals and pay much lower settlements, compared to non‐timely reporters. Overall, our evidence provides new insights into how market participants incorporate information about internal control weaknesses into their perceptions regarding the economic implications of financial restatements, and financial reporting quality.

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“…The risk of large penalties for non-compliance with these regulations (Rice, Weber & Wu, 2012;Zhang, 2007) suggests that firms have a strong incentive to implement processes that can systematize and formalize the collection and reporting of information in order to minimize errors and thus support compliance efforts.…”

Section: Introductionmentioning

confidence: 99%

The Use of an ERP System to Facilitate Regulatory Compliance

Mundy

Owen

2013

Information Systems Management

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This article reports the findings of a case study conducted in a multinational organization that aims to investigate how an enterprise resource planning system (ERP) can facilitate control over reporting processes and thus ensure compliance with regulatory requirements. The findings demonstrate how the use of an ERP to comply with financial regulation can impact organizational roles. In particular, IT managers must ensure that the ERP addresses regulatory requirements for internal control over financial reporting.

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Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal Control Weaknesses

Cited by 21 publications

References 12 publications

Do Clients’ Enterprise Systems Affect Audit Quality and Efficiency?

Do Clients’ Enterprise Systems Affect Audit Quality and Efficiency?

Material weakness disclosures and restatement announcements: The joint and order effects

The Use of an ERP System to Facilitate Regulatory Compliance

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