The Role of Timing and Management's Remediation Actions in Preventing Failed Remediation of Material Weaknesses in Internal Controls*

Abstract

Prior research finds that signals of remediation of internal control weaknesses do not guarantee that all weaknesses are fully resolved. However, why certain remediation strategies fail is unclear. This study examines how remediation timing and actions affect the likelihood of a failed remediation. I predict and find that the likelihood of a failed remediation is decreasing in both the time a company takes to remediate and in the extent of remediation actions employed. Importantly, this study documents that disclosures of material changes in internal control provide information useful in assessing the likelihood of a failed remediation, as well as evidence that prompt remediation does not necessarily result in a successful remediation. Moreover, I find that there are consequences to remediation failures in the form of a higher likelihood of management and board turnover. Finally, I find evidence that economic benefits of remediation found in prior research may be understated. This study can provide stakeholders with insights into how the nature, extent, and timing of a remediation strategy can reduce the likelihood of a failed remediation.

Does the disclosure of internal control material deficiency remediation information matter for ESG performance? Evidence from China

“…These measures are more likely to win market trust and tolerance [ 38 ], which can, in turn, help firms access resources and bolster their motivation to practise ESG. These findings are compatible with prior theories that firms' operating performance improves in the year following the remediation of material deficiencies [ 26 , 27 , 40 ]. As previously mentioned, remediation actions are important signals that a firm's management is taking steps toward improving, which garners more trust and support for the firm to invest in ESG, ultimately promoting ESG performance.…”

“…Firstly, ICMDR information disclosure significantly and positively influences ESG performance, the result that remains valid across various endogeneity concerns and robustness tests. The results suggest that firms that engage in ICMDR information disclosure have better ESG performance, which is consistent with the relevant theoretical frameworks and with signalling and stakeholder theory, as well as with the findings reported in previous literature [ 26 , 27 , 40 ]. Secondly, our analytical results obtained using the mediating effect model show that ICMDR disclosure positively affects ESG performance through the mitigation of financial risk.…”

“…First, our study contributes to the internal control system and ESG literature on the remediation of material deficiencies in enterprises' internal control systems by examining the role of ICMDR information disclosure--financial risks--in promoting enterprises' ESG performance. Feng et al [ 26 ] and Imdieke [ 27 ] recently investigated the effect of remediation information disclosure. Feng et al [ 26 ] focused on changes in enterprises' operating performance, and Imdieke [ 27 ] investigated the role of the timing and content of management's remediation actions in remediation outcomes.…”

“…Feng et al [ 26 ] and Imdieke [ 27 ] recently investigated the effect of remediation information disclosure. Feng et al [ 26 ] focused on changes in enterprises' operating performance, and Imdieke [ 27 ] investigated the role of the timing and content of management's remediation actions in remediation outcomes. Our study contributes to the literature by identifying the important signal transmission effect of ICMDR information disclosure.…”

Alternative finance in bank-firm relationship: how does board structure affect the cost of debt?

“…Francis et al (2017) further stressed that traditional, low-turnover boards might lack the necessary comprehension of the unique dynamics of alternative finance models. Imdieke (2022) postulated, this lack of expertise might increase the risk perception of lenders, subsequently increasing the cost of debt. Ferreira et al (2018) concluded by stating that these boards might not cater effectively to the expectations of alternative finance providers, further elevating debt costs.…”