Internal control material weakness opinions and the market's reaction to securities fraud litigation announcements

Tsai, Yu Cheng; Huang, Hua Wei

doi:10.1016/j.frl.2020.101833

Cited by 10 publications

(3 citation statements)

References 10 publications

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“…It also requires external auditors to report independently on the effectiveness of audit clients’ internal control and risk management systems (PCAOB, 2002; Mallin, 2016). Tsai and Huang (2020) find that declines in stock price on securities fraud litigation announcement dates are significantly more severe for publicly litigated firms receiving US SOX 404 internal control material weakness opinions.…”

Section: Corporate Governance Mechanisms Recommended For Countering F...mentioning

confidence: 88%

Elucidating corporate governance’s impact and role in countering fraud

Kassem

2022

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Purpose This paper aims to highlight the role and impact of corporate governance in combating fraud by drawing on insights from the literature, identify gaps in the literature and suggest new directions for future research. Design/methodology/approach The paper is based on a comprehensive general literature review using multiple search engines and databases. Findings This paper finds that effective corporate governance can help reduce fraud risk, prevent fraud and detect fraud, particularly corporate fraud, insider fraud and asset diversion. Some companies use corporate governance mechanisms to bolster their reputation following fraud detection. Ineffective corporate governance increases fraud risk, provides the opportunity for perpetrating fraud and reduces the likelihood of fraud detection. The paper sheds light on several governance mechanisms that could help in mitigating fraud risk, as reported in the literature. The paper categorises these governance mechanisms into four broad governance aspects, including board leadership and the role of ethics; (b) board characteristics, composition and structure; ownership structure; accountability. The paper proposes a guide summarising these broad fundamental governance aspects, including specific anti-fraud controls and examples of how organisations could enhance ethical cultures and the tone at the top. Originality/value To the best of the author’s knowledge, this is the first paper to elucidate the role of corporate governance in countering fraud and develop guidance in this area. The proposed guidance could be helpful to businesses leaders, policymakers, researchers and academics alike.

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Section: Corporate Governance Mechanisms Recommended For Countering F...mentioning

confidence: 88%

Elucidating corporate governance’s impact and role in countering fraud

Kassem

2022

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“…Research has found that firms disclosing MW tend to be smaller, poorer and more unstable in organizational structure; moreover, these firms also tend to have greater complexity, lower audit committee member tenure, higher growth, poor accruals quality, greater exposure to accounting-related risks and a greater likelihood of fraud (Doyle et al , 2007b; Ashbaugh et al , 2007; Donelson et al , 2017). Recent research has also found that decreases in stock market price are more severe for litigated firms reporting MW (Tsai and Huang, 2021).…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Financial statement fraud litigation, material weaknesses, and board characteristics

Manry

Huang

Yan

2023

ARJ

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Purpose The purpose of this study is to investigate whether the likelihood that a firm will face financial statement fraud litigation is affected by the disclosure of internal control material weaknesses (MW) and the “busyness” of a firm’s board of directors. Design/methodology/approach The results are derived from logistic regression models and data are collected from the Audit Analytics database augmented by data from CompuStat, the Stanford Law School website and the SEC Accounting and Auditing Enforcement Releases. The authors also test for endogeneity with a propensity score matching procedure. Findings The authors find that an MW report is strongly associated with the likelihood of subsequent financial statement fraud litigation, and that the influence of entity-level MW on litigation likelihood is stronger than that of account-level MW. Moreover, the number of outside board directorships significantly increases the influence of entity-level MW on the likelihood of litigation, indicating that board of directors’ busyness significantly increases the risk of litigation. Originality/value Previous research notes that board members holding multiple directorships cannot effectively oversee the financial reporting process and, thus, are associated with poorer governance. The authors extend this implication of board busyness to the association between disclosure of MW type and the filing of subsequent litigation alleging financial statement fraud. To the best of the authors’ knowledge, no other research has done so.

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“…Specifically, such penalties tarnish a firm's reputation and erode the credibility of disclosures. This can increase transaction costs such as corporate financing costs and audit fees (Lee & Ha, 2021; Wu et al, 2021; Yuan et al, 2016), diminish cumulative returns for firms (Firth et al, 2011), and trigger unfavorable market responses from investors (Tsai & Huang, 2021). Furthermore, it has been demonstrated that in firms subjected to administrative penalties, executives face risks such as salary reductions and demotions (Conyon & He, 2016).…”

Section: Introductionmentioning

confidence: 99%

Administrative penalties and corporate CSR disclosure strategies

Duan,

Zhang,

Meng

2024

Manage Decis Econ

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Corporate social responsibility (CSR) disclosure is an important way for firms to achieve social goals. As stakeholders pay more attention to CSR performance, the CSR report strategy has attracted academic attention. Prior studies have stressed the important role of positive CSR disclosure strategies in a firm's reputation and market value, but our study shows different findings. Using a sample of China's A‐share listed firms from 2008 to 2019, we find a significant negative correlation between administrative penalties and the use of pictures and tables in CSR reports, which is more significant for firms being penalized rather than individuals in firms. Investor attention and agency costs provide a mechanism explanation. Heterogeneity analysis shows that in regions with a low level of legal institutions, the effects of administrative penalties on the use of pictures and tables in CSR reports are more significant. Nevertheless, the seemingly negative disclosure strategy ultimately contributes to corporate value.

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Internal control material weakness opinions and the market's reaction to securities fraud litigation announcements

Cited by 10 publications

References 10 publications

Elucidating corporate governance’s impact and role in countering fraud

Elucidating corporate governance’s impact and role in countering fraud

Financial statement fraud litigation, material weaknesses, and board characteristics

Administrative penalties and corporate CSR disclosure strategies

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