Internal Control Weaknesses and Information Uncertainty

Beneish, Messod Daniel; Billings, Mary Brooke; Hodder, Leslie D.

doi:10.2139/ssrn.896192

Cited by 98 publications

(87 citation statements)

References 47 publications

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“…The reaction to the MW disclosure is also economically meaningful, which implies that the debt value of an average MW firm in our sample may be reduced by approximately 0.16% or $14 million during the three days surrounding MW disclosures. This finding is consistent with the findings of Beneish et al (2008) that SOX 404 MW 7 Lok and Richardson (2011) provide a method to calculate the credit return by considering the carry component of a CDS contract and its duration and show that, over short windows, raw changes and credit returns are highly correlated. We find similar results using CDS raw changes instead of percentage changes.…”

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confidence: 88%

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Internal Control Quality and Credit Default Swap Spreads

Tang

Tian

Yan

2015

Accounting Horizons

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i Internal Control Quality and Credit Default Swap SpreadsSYNOPSIS: This paper presents the first study on the effects of internal control quality on derivatives pricing. Specifically, we utilize data from the credit default swap (CDS) transactions of well-monitored companies to examine the relationship between the quality of internal control and the cost of debt. The CDS data we employ are advantageous for our analysis because CDS contracts are comparatively more homogeneous, standardized, and liquid than bank loans and public bonds. We find that CDS spreads increase around the disclosure of internal control material weaknesses (MWs) and that, all else equal, companies experiencing MWs with respect to internal control have higher CDS spreads than companies with effective internal control.Moreover, companies with company-level MWs have higher CDS spreads than those with less severe, account-specific MWs. In addition, remediating internal control MWs is associated with a decrease in CDS spreads. Our study offers a new perspective on the relationship between the quality of internal control and the cost of debt. These conflicting results may be due to heterogeneous characteristics and measurement issues in using bank loans and public bonds to measure credit spreads. Covenants, embedded optionalities (such as callability and convertibility), and other complicating factors associated with bank loans and public bonds may distort the relationship between credit risk and internal control quality. Furthermore, because information on bank loans is only available when companies receive new loans, researchers are relegated to three-or four-year windows in their observations of changes in loan spreads (Dahilwal et al. 2011). By contrast, CDS contracts are relatively homogeneous and standardized, and CDS spreads reflect credit risk better than loan or 3 bond spreads (Shivakumar et al. 2011;Callen et al. 2009) because the CDS market is not as plagued with the liquidity issues that affect the public bond and bank loan markets. Therefore, CDS spreads are a superior means of examining the impact of internal control quality on credit pricing.We expect CDS spreads to be positively related to internal control MWs for two reasons.First, a firm that is experiencing MWs in internal control suggests that its financial reporting may be unreliable, which thereby increases the perceived information risk from the perspective of a credit investor. Such information risk related to unreliable information sources leads an investor to charge a higher credit risk premium (e.g., Duffie and Lando 2001;Lambert et al. 2007).Second, internal control MWs make it easier for managers to misappropriate a company's assets, which increases the default risk. For example, Skaife et al. (2013) report that the profitability of insider trading is significantly greater in firms with internal control MWs, which suggests the risk of expropriation of outside shareholders when there are weak internal controls.In an examination of the period from November 15, 2004, ...

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confidence: 88%

“…On the one hand, Ogneva et al (2007) find no association among internal control MWs and several risk measures-including the cost of equity capital, earnings quality, and return volatility-after controlling for other firm characteristics. Beneish et al (2008) demonstrate that equity markets do not react to Section 404 internal control weakness disclosures.…”

mentioning

confidence: 93%

Internal Control Quality and Credit Default Swap Spreads

Tang

Tian

Yan

2015

Accounting Horizons

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“…The companies that are usually at risk are small size corporations, with more liabilities and financial risk. On the contrary, Beneish et al (2008) and Ashbaugh-Skaife et al (2009) thought that a proper series of measurements regarding internal control would result in a series of reaction, such as the changing of current retain on equity and management strategy. Positive ICQ can lower the cost of equity and promote the CFP, thus making an enterprise more competitive in the business market to some extent.…”

Section: The Relationship Between Icq and Cfpmentioning

confidence: 99%

The Empirical Study among Internal Control, Social Responsibility and Financial Performance based on Chinese Listed Food and Beverage Industry

Chen¹

2018

JAEF

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Abstract. This study revisits a classic yet still an intriguing question regarding the relationship between corporate social responsibility (CSR) and corporate financial performance (CFP). To explore the potential influence factor between the mentioned two factor, it is necessary to take internal control quality (ICQ) into account. The relation will be achieved by testing the panel data of 81 listed Chinese food and beverage industry from 2011 to 2015. There are three estimation hypotheses concerning three relations: the positive association between ICQ and CFP, the positive relationship between CSR and CFP, and finally the intermediate effect of CSR on the ICQ and CFP. Overall, results demonstrate that both ICQ and CSR have a significant positive relationship with CFP based on a series indexes. Moreover, the mediator effect has been mainly verified by the regression model according to the weight change of ICQ in the model.

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“…[18] Find that the use of IAF as a management training ground is positively associated with external audit fees. However, [19] reported an increased in external audit fees as a result of internal control reporting requirements of SOX.…”

Section: Literature Reviewmentioning

confidence: 99%

Internal audit function: a comparison between private and public sector in Nigeria

2017

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Abstract. This study compares the internal audit functions between private and the public sector. Features examined include hierarchical rank of internal audit function, internal audit transfer, outsourcing of internal audit services and working relationship of internal audit with external auditor. The study is based on a survey of internal audit managers and chief internal auditors in private and public sector entities in Nigeria. The results revealed that there is no much difference in hierarchical rank of internal audit function in both sectors. While the results showed that differences exist in the reporting status between internal audit in the two sectors with private sector internal audit reporting to audit committee and chief executive officer and public sector internal audit reporting to chief executive officer and chief financial officer. Almost a similar amount of work is outsourced, and private sector entities are more likely to outsource than those in public sector. There is slight difference between internal audit activities and interaction with external auditor in the two sectors with private sector more likely to coordinate in the area of access to audit working papers.

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Internal Control Weaknesses and Information Uncertainty

Cited by 98 publications

References 47 publications

Internal Control Quality and Credit Default Swap Spreads

Internal Control Quality and Credit Default Swap Spreads

The Empirical Study among Internal Control, Social Responsibility and Financial Performance based on Chinese Listed Food and Beverage Industry

Internal audit function: a comparison between private and public sector in Nigeria

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