Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and their Subsequent Remediation

61 Pages Posted: 10 Feb 2008 Last revised: 17 Jan 2014

See all articles by Karla M. Zehms

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Chan Li

University of Kansas

Kathleen Hertz Rupley

Portland State University

Date Written: January 1, 2010

Abstract

The revelation of material negative events about a firm, including issues such as fraud, restatements, or internal control material weaknesses (ICMWs), may destabilize the firm’s corporate governance equilibrium as it works to remediate the event or effects thereof. Prior research investigates the association between the revelation of fraud and restatements and both board and management turnover. We extend that research, proposing and testing a conceptual model of the process that firms use to remediate negative events in general and ICMWs specifically, with a focus on the role of governance structure changes. Using a sample of 733 firms revealing an ICMW compared to 3,602 firms with unqualified internal control reports, results reveal a positive association between disclosure of ICMWs and subsequent turnover of members of boards of directors, audit committees, and top management. Focusing on the ICMW sample and comparing the 511 firms that remediate their ICMWs to the 222 firms that do not, results illustrate a positive association between remediation of ICMWs and improvements in the characteristics of boards of directors, audit committees, and top management.

Data Availability: Data are publicly available from sources identified in the paper.

Keywords: SOX Section 404, internal control material weakness remediation, corporate governance

JEL Classification: M41

Suggested Citation

Zehms, Karla M. and Li, Chan and Rupley, Kathleen Hertz, Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and their Subsequent Remediation (January 1, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1091685

Karla M. Zehms (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Kathleen Hertz Rupley

Portland State University ( email )

PO Box 751
Portland, OR 97207
United States
503-725-3133 (Phone)
503-725-5850 (Fax)

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