The ICFR Process: Perspectives of Accounting Executives at Large Public Companies
63 Pages Posted: 8 Jan 2021 Last revised: 27 Dec 2022
Date Written: December 24, 2022
Abstract
The Sarbanes-Oxley Act charges management with the primary responsibility for
internal controls over financial reporting (ICFR). However, prior research tells us little about the
ICFR process from management’s perspective. We develop a theoretical model of the ICFR
process from management’s perspective and examine that model by surveying 145 and
interviewing 35 accounting executives at large U.S. public companies. Our primary finding is that
executives feel constrained in their ability to direct ICFR and hold perspectives that reflect these
constraints. Specifically, most executives feel compelled by auditors to follow the PCAOB’s
preferences even though executives believe these preferences often tend to distract management
and auditors from riskier areas. Executives also believe that audit committees’ involvement in
ICFR is too passive and that auditors’ assessments are sometimes too severe, prompting executives
to push back on auditors. Overall, executives strive to make decisions that are optimal for their
ICFR, but limited resources and other business conditions such as restructuring events and lack of
qualified personnel limit the effectiveness of their ICFR efforts. We discuss the implications of
our results for practitioners, regulators, and researchers.
Keywords: ICFR, internal controls, accounting executives, COSO, auditors, audit committees
JEL Classification: M4, M40, M41, M42, M48
Suggested Citation: Suggested Citation