Does Ineffective Internal Control over Financial Reporting Affect a Firm’s Operations? Evidence from Firms’ Inventory Management
49 Pages Posted: 10 Dec 2012 Last revised: 2 Aug 2014
Date Written: August 1, 2014
Abstract
We investigate whether ineffective internal control over financial reporting has implications for firm operations by examining the association between inventory-related material weaknesses in internal control over financial reporting and firms’ inventory management. We find that firms with inventory-related material weaknesses have systematically lower inventory turnover ratios and are more likely to report inventory impairments relative to firms with effective internal control over financial reporting. We also find that inventory turnover rates increase for firms that remediate material weaknesses related to inventory tracking. Remediating firms also experience increases in sales, gross profit and operating cash flows. Finally, we assess the generalizability of our findings by examining all material weaknesses in internal control over financial reporting, regardless of type, and provide evidence that firms’ return-on-assets are associated with both their existence and remediation. Collectively, our findings support the general hypothesis that internal control over financial reporting has an economically significant effect on firm operations.
Keywords: Internal Control, Inventory Management, Firm Operations
JEL Classification: M41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Determinants of Weaknesses in Internal Control over Financial Reporting
By Jeffrey T. Doyle, Weili Ge, ...
-
Accruals Quality and Internal Control Over Financial Reporting
By Jeffrey T. Doyle, Weili Ge, ...
-
Internal Control Weakness and Cost of Equity: Evidence from Sox Section 404 Disclosures
By Maria Ogneva, Kannan Raghunandan, ...
-
By Jacqueline S. Hammersley, Linda A. Myers, ...
-
Internal Control Weaknesses and Information Uncertainty
By Messod D. Beneish, Mary Brooke Billings, ...
-
The Wealth Change and Redistribution Effects of Sarbanes-Oxley Internal Control Disclosures
By Gus De Franco, Yuyan Guan, ...
-
The Discovery and Reporting of Internal Control Deficiencies Prior to Sox-Mandated Audits
By Hollis Ashbaugh Skaife, Daniel W. Collins, ...
-
By Stephen H. Bryan and Steven B. Lilien