The effect of the type and number of internal control weaknesses and their remediation on audit fees

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The implementation of compliance procedures associated with the Sarbanes-Oxley Act of 2002 came at a great cost to most publicly-traded firms, largely due to the internal control disclosures required by Section 404 of the Act. The purpose of this paper is to contribute to the inquiry on internal control effectiveness by examining the impact of the type (same or different) and number of internal control weaknesses on audit fees. The paper also examines whether firms that remediate continue to incur higher audit fees compared to firms that never disclosed a weakness. Design/methodology/approach -The authors evaluate the impact of internal control weaknesses and their remediation on audit fees using ordinary least squares regression for 9,122 firm year observations (3,096 unique firms) over the time period 2004-2007. Findings -The authors find: an incremental impact on audit fees of additional material weakness disclosures; firms that report the same material weakness pay higher fees than firms reporting a different material weakness in consecutive years; and audit fees remain high one, two, and three years following remediation compared to a firm that never disclosed an internal control weakness. Originality/value -In contrast with prior studies, the sample includes firms that remediated weaknesses, firms that failed to remediate weaknesses, and firms that did not have prior weaknesses. The results suggest that the failure to remediate has greater risk implications than new weaknesses and that material weaknesses are associated with higher audit fees several years after remediation.

Factors Influencing the Weaknesses of Internal Control of Local Governments in Indonesia

“…This is also because the previous year's figures are restated in the next accounting period. Research by Keane et al (2013) showed that the company will reveal the same material weaknesses in the previous and current years.…”

“…Mulyani & Suryawati, 2011). ResearchKeane et al (2013) stated the audit findings of the previous year positively and significantly influence the same findings in the audit year. Yamin & Sutaryo (2014) stated that the findings of internal control weaknesses in the previous year positively affect the weaknesses of internal control of local governments H5: Findings of the weakness of internal control in the previous year positively influences the weaknesses of internal control of the local governments.…”

Internal Control Weakness and CEO Media Exposure

“…Public opinion on corporate misconduct not only damages the social image of the company and the manager, but also urges other institutions to strengthen board supervision. Prior literature shows that disclosing ICW causes negative consequences in falling stock price (Hammersley et al, 2008), increasing capital cost (Ashbaugh-Skaife et al, 2009), raising audit fees (Keane, Elder, & Albring, 2012) and poor performance (Esmaeili & Sharigabadi, 2015).…”

Research and Discussing on Internal Control Auditing

“…Based on resource dependency theory that stresses entity's economic needs for internal control over administering federal funding, they select a sample of nonprofit hospitals subject to the Single Audit Act in the United States, from 2001 to 2008. Their results show that hospitals that had audit committees and also employed Big 4 auditors were associated with better internal control quality [4].…”