Why Don't Japanese Companies Disclose Internal Control Weakness?: Evidence from J-SOX Mandated Audits

Yazawa, Kenichi

doi:10.2139/ssrn.1607709

Cited by 3 publications

(5 citation statements)

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“…It is notion that inefficient internal controls lead to lower financial reporting quality. This finding is in accordance with the findings of Li et al (2018), Salehi and Bahrami (2017), Ji et al (2017), Dowdell et al (2014), Ilive (2010), Yazawa (2010) and Doyle et al (2007a, b). They concluded that a weakness in internal controls reduces financial reporting quality.…”

Section: Discussionsupporting

confidence: 89%

“…The main purpose of this study is to investigate the relationship between internal controls weakness and financial reporting quality, and moderating role of ownership structure, concentrating on family firms listed in TSE market, in this regard. In this direction, we observed studies of researchers including Ji et al (2017), Bardhan et al (2015), Chen et al (2015), Dowdell et al (2014), Ilive (2010), Yazawa (2010) and Doyle et al (2007a, b), etc. Therefore, the main purpose of this study is to focus on the relationship between family ownership and internal controls weakness with financial reporting quality in Iran.…”

Section: Discussionmentioning

confidence: 88%

“…Internal control weakness shows a defect in internal controls, which is mostly used in recent studies to evaluate the effect of internal control quality on financial reporting, earlier investigations include Lin et al (2011), Doyle et al (2007a, b), Hoitash et al (2009). Ilive (2010), Yazawa (2010) and Doyle et al (2007a, b) reported that weakness in internal controls may decrease financial reporting quality. Bédard (2006) concluded that unexpected accruals are higher in a year in which internal control weakness is disclosed; it is because weaknesses of management opportunism are increased.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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The effect of internal controls on financial reporting quality in Iranian family firms

Dashtbayaz

Salehi

Safdel³

2019

JFBM

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Purpose The purpose of this paper is to investigate the relationship between internal controls weakness and financial reporting quality and the effect of family ownership on the mentioned relationship in Iranian listed firms. Design/methodology/approach In this way, the authors included the number of 139 firms from 2013 to 2017, of which 28 were family firms. The hypotheses are analyzed based on panel data and means comparison. Findings The results illustrated that weakness in internal controls has a significant negative relationship with financial reporting quality. In other words, internal controls weakness decreases the quality of financial reporting quality. Moreover, the results showed that being familial does not affect the aforementioned relationship. Originality/value Consequently, there is no suitable criteria to distinguish family firms and there is a need to take them into serious consideration because very few studies have been conducted focusing on this issue in Iran, as it is considered an argumentative subject to be discussed in the Iranian market.

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Section: Discussionsupporting

confidence: 89%

Section: Discussionmentioning

confidence: 88%

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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The effect of internal controls on financial reporting quality in Iranian family firms

Dashtbayaz

Salehi

Safdel³

2019

JFBM

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“…The only studies that exist are on the market reaction to the disclosure of internal control deficiencies in the Japanese corporate environment, which reported mixed results. Kawanishi and Takeda (2010) and Yazawa (2010) find no stock price reactions to the disclosure of internal control weaknesses, suggesting no informational value from the market in this disclosure. Nishizaki et al (2014) find a negative stock MAJ 30,4/5 market reaction to the disclosure of internal control weaknesses.…”

Section: Differences In Monitoring the Regulations Between The Usa And Japanmentioning

confidence: 88%

Did Japanese-SOX have an impact on earnings management and earnings quality?

Nakashima

Ziebart

2015

Managerial Auditing Journal

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Purpose – The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan. Design/methodology/approach – This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness. Findings – The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period. Research limitations/implications – The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research. Practical implications – The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems. Originality/value – This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.

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“…The companies' internal control quality affects the financial reporting quality, auditor decisions, and the reduction of governance problems. Extensive research on internal controls shows that weaknesses in the internal control system reduce the quality of financial reporting (Lin et al 2011;Doyle et al 2007;Iliev 2010;Yazawa 2010). According to a study by Ji et al (2017), designing an effective internal control system ensures financial reporting quality.…”

Section: Internal Control Weaknessmentioning

confidence: 99%

The Effect of Social Capital on Auditor’s Performance

Azghandi

Jabbari

Ranjbar

et al. 2023

JRFM

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This paper investigates the relationship between social capital and auditor’s performance in Iranian listed firms. The sample included 128 firms on the Tehran Stock Exchange from 2014 to 2020. The research method was descriptive-correlational, and the relationship between research variables was explained using regression models based on the panel data. The results illustrated that social capital positively correlates with auditor performance and Audit report quality. In other words, social capital decreases audit opinion shopping, audit expectation gap, internal control weakness, and audit report lag. Therefore, society’s influential assets, social capital, and audit report quality strongly influence the auditor’s performance. The auditor’s performance affects the probability of discovery and reporting material errors and misstatements. Therefore, recognizing influential factors on auditors’ performance can improve the quality of audit reports.

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Why Don't Japanese Companies Disclose Internal Control Weakness?: Evidence from J-SOX Mandated Audits

Cited by 3 publications

References 0 publications

The effect of internal controls on financial reporting quality in Iranian family firms

The effect of internal controls on financial reporting quality in Iranian family firms

Did Japanese-SOX have an impact on earnings management and earnings quality?

The Effect of Social Capital on Auditor’s Performance

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