The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality
Hollis Ashbaugh Skaife
University of Wisconsin, Madison - Department of Accounting and Information Systems
Daniel W. Collins
University of Iowa - Department of Accounting
William R. Kinney, Jr.
University of Texas at Austin - Department of Accounting
July 23, 2007
This paper investigates the effect of internal control deficiencies and their remediation on accrual quality. We first document that firms reporting internal control deficiencies have lower quality accruals as measured by accrual noise and absolute abnormal accruals relative to firms not reporting internal control problems. Second, we find that firms that report internal control deficiencies have significantly larger positive and larger negative abnormal accruals relative to control firms. This finding suggests internal control weaknesses are more likely to lead to unintentional errors that add noise to accruals than intentional misstatements that bias earnings upward. Third, we document that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems. Finally, we find firms that receive different internal control audit opinions in successive years exhibit changes in accrual quality consistent with changes in internal control quality. Collectively, our cross-sectional and inter-temporal change tests provide strong evidence that the quality of internal control affects the quality of accruals.
Number of Pages in PDF File: 52
Keywords: accrual quality, internal control, auditing
JEL Classification: G34, M41, M43, M49, G38working papers series
Date posted: June 6, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.766 seconds