Abstract

http://ssrn.com/abstract=2012609
 
 

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The Effect of Change in the Reporting Threshold and Type of Control Deficiency on Equity Analysts’ Evaluation of the Reliability of Future Financial Statements


Stephen Kwaku Asare


University of Florida - Fisher School of Accounting

Arnold Wright


Northeastern University - Accounting Group

November 14, 2011

Auditing: A Journal of Practice & Theory, May 2012

Abstract:     
We examine the joint effects of the reporting threshold (more than remote versus reasonably possible) and type of control deficiency (entity level versus account specific) described in the adverse report on internal controls on equity analysts’ evaluation of the reliability of a company's future financial statements. We hypothesize that equity analysts interpret a “more than remote” threshold to mean a significantly lower likelihood than a "reasonable possibility” threshold. We also hypothesize that when the reporting threshold is more than remote, equity analysts who evaluate an entity level material weakness will indicate a higher likelihood of future material misstatements than those who evaluate an account specific material weakness. However, when the reporting threshold is reasonably possible, equity analysts will assess the same likelihood of future misstatements for both types of material weakness. The results from an experiment that employed 65 equity analysts support our hypotheses. Taken together, the findings suggest that the change to the “reasonably possible” regime has made the account specific material weakness more consequential in evaluating the reliability of the future financial statements but had no effect on the evaluation of entity level material weaknesses.

Number of Pages in PDF File: 36

Keywords: adverse control reports, reporting thresholds, type of control deficiencies, early warning signal, users’ likelihood assessments

JEL Classification: M40

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Date posted: February 28, 2012  

Suggested Citation

Asare, Stephen Kwaku and Wright, Arnold, The Effect of Change in the Reporting Threshold and Type of Control Deficiency on Equity Analysts’ Evaluation of the Reliability of Future Financial Statements (November 14, 2011). Auditing: A Journal of Practice & Theory, May 2012. Available at SSRN: http://ssrn.com/abstract=2012609

Contact Information

Stephen Kwaku Asare (Contact Author)
University of Florida - Fisher School of Accounting ( email )
Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
HOME PAGE: http://warrington.ufl.edu/fsoa/
Arnold Wright
Northeastern University - Accounting Group ( email )
406 Hayden Hall
United States

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