Internal control weaknesses and evidence of real activities manipulation

Lenard, Mary Jane; Petruska, Karin A.; Alam, Pervaiz; Yu, Bing

doi:10.1016/j.adiac.2016.04.008

Cited by 38 publications

(17 citation statements)

References 46 publications

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“…Thus, the audit committee may pressurize the IAF provider to monitor and report such activities, as IAF is under its monitoring, and assists it to perform financial reporting and oversights of internal control systems (Bajra & Cadez, 2018a; Sarens, De Beelde, & Everaert, 2009). Lastly, material weakness research also supports the role of IAF in the context of REM (Järvinen & Myllymäki, 2016; Lenard, Petruska, Alam, & Yu, 2016; Lin, Pizzini, Vargus, & Bardhan, 2011). This research contends that REM activities are committed if there is a material weakness in the internal control system that results from low‐quality IAF.…”

Section: Background Prior Research and Hypothesis Developmentmentioning

confidence: 75%

“…We also contend that firm‐specific expertise of external IAF providers will constrain REM for the following reasons. First, REM can be committed through violating the regular internal control procedures throughout the year, such as credit terms, raw materials flow and expenses recognition (Järvinen & Myllymäki, 2016; Lenard, Petruska, Alam, & Yu, 2016). Since IAF activities are mostly related to auditing and developing internal control procedures related to operations and financial reporting (Bajra & Cadez, 2018a; Sarens, De Beelde, & Everaert, 2009), external IAF providers can build extensive knowledge of the client's internal control system through familiarity.…”

Section: Background Prior Research and Hypothesis Developmentmentioning

confidence: 99%

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Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

2021

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As the outsourced internal audit function (IAF) and real earnings management are attracting widespread attention among firms, it is vital for stakeholders to understand how these two practices affect the quality of financial reporting. This study examines how the expertise of an external IAF provider reduces real earnings management. Using a pooled panel data regression of 928 firm‐observations, we find that the external IAF provider's firm‐specific expertise is significantly associated with lower real earnings management. Conversely, we report no such association for external IAF providers with industry expertise. These findings are robust under a battery of sensitive analyses. The results of additional analyses show that the industry and firm‐specific expertise of external IAF provider interact with each other, resulting in a significant reduction in real earnings management. We also find significant differences in the IAF quality between big4 and second‐tier audit firms in which the latter are associated with lower real earnings management and the former with higher real earnings management. Finally, we observe low real earnings management for important clients and/or those with influential CEOs if the external IAF provider has firm‐specific expertise.

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Section: Background Prior Research and Hypothesis Developmentmentioning

confidence: 75%

Section: Background Prior Research and Hypothesis Developmentmentioning

confidence: 99%

Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

2021

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“…Strong internal controls further enhance corporate governance by improving the spillover effects of the information environment. Lenard et al (2016) find that firms with internal control deficiencies are more likely to use real earnings management to implement earnings manipulation, while those that achieve compliance report less satisfactory performance levels the next year. Furthermore, firms with high-quality internal control can effectively suppress this type of surplus manipulation, which deviates from the production and operation objectives.…”

Section: Literature Reviewmentioning

confidence: 95%

Product-market competition, internal control quality and audit opinions. Evidence from Chinese listed firms

Zhang

Chen

2020

RC-SAR

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Sobre la base de los datos de las empresas que cotizan en los mercados bursátiles A de Shangai y Shenzhen entre 2007 y 2015, este estudio examina las relaciones entre la calidad del control interno, la competencia en el mercado de productos y las opiniones de auditoría. Los resultados empíricos revelan que (1) cuanto mejor sea la calidad del control interno de las empresas que cotizan en bolsa, más probable es que un contador público certificado emita una opinión sin modificaciones; (2) la competencia en el mercado de productos se asocia positivamente con las opiniones sin modificaciones; (3) la competencia en el mercado de productos debilita la relación positiva entre la calidad del control interno de las empresas que cotizan en bolsa y la probabilidad de que un contador público certificado emita una opinión sin modificaciones; y (4) el impacto significativo de la competencia en el mercado de productos sobre la relación entre el control interno de la calidad y las opiniones sin modificaciones sólo existe en las industrias no monopolísticas. Based on data on listed firms in the Shanghai and Shenzhen A-share stock markets from 2007 to 2015, this study examines the relations among the quality of internal control, product-market competition and audit opinions. The empirical results reveal that (1) the better the quality of the internal control of listed firms is, the more likely a certified public accountant will be to issue a unmodified opinion; (2) the product-market competition is positively associated with unmodified opinions; (3) the product-market competition weakens the positive relation between the quality of the internal control of listed firms and the likelihood that a unmodified opinion will be issued by a certified public accountant; and (4) the significant impact of product-market competition on the relation between internal control quality and unmodified opinions exists only in non-monopoly industries.

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“…Moreover, REM reflects weaknesses in the internal audit function (IAF). A study conducted by Lenard, Petruska, Alam, and Yu (2016) in the US market demonstrated that internal control weaknesses in companies is positively associated with REM, thus suggesting that companies which practice REM have lower performance in subsequent years. Similarly, Moradi, Salehi, and Zamanirad (2015) reported that REM is negatively associated with the future performance of companies.…”

Section: Consequences Of Real Earnings Managementmentioning

confidence: 99%

Real Earnings Management: A Review of Literature and Future Research

Ali¹,

Kamardin²

2018

AJFA

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In recent years, increasing attention has been given to real earnings management (REM) as an alternative method to accrual-based earnings management. This paper reviews the recent studies on REM to provide updated and comprehensive information about this type of earnings management. Specifically, the review focuses on REM definitions, motivations, techniques, consequences, and measurement. In addition, the paper provides a discussion of the theoretical frameworks used by researchers as underpinning theories of earnings management. The review of the literature showed that companies have shifted earnings management practising from accruals-based to real activities based. Useful suggestions for REM research opportunities are also provided.

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Internal control weaknesses and evidence of real activities manipulation

Cited by 38 publications

References 46 publications

Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

Product-market competition, internal control quality and audit opinions. Evidence from Chinese listed firms

Real Earnings Management: A Review of Literature and Future Research

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