Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms

Liu, Wu-Po; Huang, Hua Wei

doi:10.1016/j.ibusrev.2020.101712

Cited by 8 publications

(3 citation statements)

References 45 publications

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“…Cross-country research on financial reporting of internal controls has become popular (Huang, 2009; Liu and Huang, 2020). We encourage further study using samples of international firms to evaluate whether cultural factors affect internal control quality and financial reporting quality.…”

Section: Discussionmentioning

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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Section: Discussionmentioning

confidence: 99%

Financial statement fraud litigation, material weaknesses, and board characteristics

Manry

Huang

Yan

2023

ARJ

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“…Their sustained competitive advantage arises from the unique resources and capabilities they possess. As a result, the wealth of governance experience often fosters a demonstration effect that prompts listed companies to address internal control deficiencies [ 43 ]. Moreover, the opening up of capital markets helps alleviate financing challenges [ 44 ], providing a stable funding source.…”

Section: Theoretical Analysis and Research Hypothesesmentioning

confidence: 99%

“…Foreign investors can be typically categorized into legal entities and individuals. Generally, individuals tend to have less professional expertise and are less involved in decision-making compared to legal entity shareholders [ 43 ]. As a result, their level of participation in governance activities, such as internal control, may be lower.…”

Section: Further Analysismentioning

confidence: 99%

Foreign ownership, subjective willing, and internal control level

Yi,

Yao,

2024

Heliyon

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The effect of internal control quality on real and accrual-based earnings management: evidence from France

2022

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This paper examines the effect of internal control (IC) quality, measured by IC weakness disclosures, on the quality of financial statements’ information, measured by real and accrual-based earnings management. The sample consists of 686 firm-year observations of French non-financial companies listed in the SBF 120 index during the period between 2012 and 2018. Using ordinary least squares (OLS) and generalized method of moments (GMM) regression, our empirical results indicate that IC weakness disclosures are positively and significantly related to real activities manipulation and negatively associated with discretionary accruals. This provides empirical evidence that a good system of IC reduces accrual-based earnings management activities and improves the reliability of financial statements; however, it cannot control real earnings management (REM). The research findings are of practical interest not only to financial analysts, auditors, and investors—guiding them to pay attention to REM activities in case of disclosures of IC weaknesses—but also to regulators, who may consider additional disclosure requirements when reporting material IC weaknesses and designing policies that could help in reducing REM practices.

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Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms

Cited by 8 publications

References 45 publications

Financial statement fraud litigation, material weaknesses, and board characteristics

Financial statement fraud litigation, material weaknesses, and board characteristics

Foreign ownership, subjective willing, and internal control level

The effect of internal control quality on real and accrual-based earnings management: evidence from France

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