Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of those Weaknesses under Section 302 of the Sarbanes Oxley Act of 2002

Hammersley, Jacqueline S.; Myers, Linda A.; Shakespeare, Catherine

doi:10.2139/ssrn.951085

Cited by 99 publications

(139 citation statements)

References 19 publications

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“…Hammersley, Myers, and Shakespeare (2008) find that stock returns are significantly more negative when internal control weaknesses are company level as investors are more concerned about the potential for material misstatements. Management fraud is also more likely to occur at firms with company-wide internal control problems because management is more capable of overriding control procedures (Ettredge, Heintz, Li, & Scholz, 2011).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 91%

Do Audit Fees Reflect Risk Premiums for Control Risk?

Jiang

Son

2014

Journal of Accounting, Auditing & Finance

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This study examines whether audit fees reflect risk premiums in the presence of control risk after controlling for audit effort through audit delay. Our results indicate that auditors adjust risk premiums as well as audit efforts in response to altered control risk. Further analysis shows that the extent of risk premium adjustment varies depending on the severity of the underlying internal control problems. Overall, these findings provide insights into the distinct role of audit effort and risk premium in audit pricing decisions.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 91%

Do Audit Fees Reflect Risk Premiums for Control Risk?

Jiang

Son

2014

Journal of Accounting, Auditing & Finance

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“…Fourth, this paper extends the growing literature on weaknesses in internal controls including the determinants of internal control problems (Krishnan, 2005; MAJ 26,4 Zhang et al, 2007;Ge and McVay, 2005;Doyle et al, 2007b;Ashbaugh-Skaife et al, 2007), and their implications on financial reporting quality, cost of capital, and firm value (Doyle et al, 2007a;Hammersley et al, 2007). Finally, this paper contributes to practice by documenting a differential sensitivity to control risk among audit firms prior to the enactment of SOX 404 as Non-Big 4 audit firms did not equally test for weaknesses in internal controls prior to the enactment of SOX 404 as Big 4 audit firms.…”

Section: Introductionmentioning

confidence: 55%

The riskiness of audit firm continuing clients' portfolio

Khalil

2011

Managerial Auditing Journal

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PurposeThe purpose of this paper is to test whether firms audited by the same Big 4 audit firm (Big 4 continuing clients) are more/less likely to report material weaknesses (systemic material weaknesses) in internal controls over a financial reporting than those audited by the same Non‐Big 4 audit firm (Non‐Big 4 continuing clients) over the period 2005‐2008. It also investigates whether the number of material weaknesses and that of systemic material weaknesses varies among the two groups.Design/methodology/approachLogistic regression and count regression analysis for panel data tests the hypotheses using all firms that had SOX 404 filings and that were audited by the same auditor over the period 2005‐2008 (1,668 firms; 6,672 firm‐year observations).FindingsFindings document that Big 4 continuing clients are less likely to report material weaknesses and systemic material weaknesses than Non‐Big 4 continuing clients, especially during the first two years of investigation. Results also demonstrate that the number of material weaknesses and that of systemic material weaknesses reported by Big 4 continuing clients is significantly lower than that reported by Non‐Big 4 continuing clients, primarily for the years 2005 and 2006.Originality/valueFindings support the risk avoidance perspective where large audit firms avoid riskier clients due to potential litigation costs and/or due to potential sanctions by the Public Company Accounting Oversight Board (PCAOB). Results also suggest that smaller audit firms did not extensively test the quality of internal controls prior to the year 2004. They highlight that the enactment of SOX 404 and the establishment of the PCAOB heightened audit firms focus on internal controls and raised their sensitivity to audit risk arising from weaknesses in internal controls over financial reporting.

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“…Ashbaugh -Skaife (2008) found that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems [7]. Hammersley et al (2008) present evidence that some characteristics of the internal control weaknesses are informative, such as their severity, management's conclusion regarding the effectiveness of the controls, their auditability, and the vagueness of the disclosures. They also found that the information content of internal control weakness disclosures depends on the severity of the internal control weakness.…”

Section: Research Aboard In Post-soxmentioning

confidence: 83%

“…They also found that the information content of internal control weakness disclosures depends on the severity of the internal control weakness. Moreover, there are negative stock price reactions to the disclosure of internal control weaknesses and material weaknesses [8]. Kim (2009) found that when firms disclose their internal control deficiencies, their abnormal stock returns are negatively associated with changes in market uncertainty (e.g., changes in the standard deviations of daily stock returns) around the disclosure and hold the belief that the disclosure of the internal control deficiencies can reduce the uncertainty of the market [9].…”

Section: Research Aboard In Post-soxmentioning

confidence: 99%

“…Hence, the interaction of the external audit and internal control deficiencies attracts more and more attention. Raghunandan and Rama (2006) found that firms disclose the internal control deficiencies have paid the higher audit fees [12][13][14] (Hogan and Wilkins, 2008;Hoitash et al, 2008;Hammersley et al, 2008). Hertz [15] (2006) provided evidence that auditor will resign because of the internal control weaknesses [14,16] (Hammersley et al, 2008; Ettredge et al, 2011).…”

Section: Research Aboard In Post-soxmentioning

confidence: 99%

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A literature review of internal control deficiencies

Wang

Gao

2015

2015 12th International Conference on Service Systems and Service Management (ICSSSM)

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Enterprise internal control system is an important component of the company administration. Internal control deficiencies have long been recognized as the main cause of accounting scandals and captured more and more attention both from regulators and the stakeholders. Through a literature review, this paper concludes that the current research mainly come from three aspects: first is about the disclosure of internal control deficiencies; Second is regard to the economic consequences of internal control deficiencies, as well as economic consequences of the deficiencies disclosure; Third is mainly concerning the remediation of internal control deficiencies and further studies. By combing the exiting literature, we provide a new direction for the further research. Keywords-internal control; internal control deficiencies; the disclosure of internal control deficiencies; literature review

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Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of those Weaknesses under Section 302 of the Sarbanes Oxley Act of 2002

Cited by 99 publications

References 19 publications

Do Audit Fees Reflect Risk Premiums for Control Risk?

Do Audit Fees Reflect Risk Premiums for Control Risk?

The riskiness of audit firm continuing clients' portfolio

A literature review of internal control deficiencies

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