Evidence from the U.S. on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting

34 Pages Posted: 4 Nov 2008 Last revised: 5 Dec 2012

See all articles by Jean C. Bedard

Jean C. Bedard

Bentley University - Department of Accountancy

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: November 3, 2008

Abstract

Securities regulators around the world are considering the costs and benefits of alternative policies for providing information to financial markets on corporate internal control. These policy options differ on the level of auditor involvement, among other dimensions. We examine the association of relative auditor involvement and auditor characteristics with Section 302 internal control disclosures made by US non-accelerated filers from 2003-2005. We find more material weaknesses disclosed in the fourth quarter, when there is relatively more auditor involvement, relative to the first three quarters. Clients of larger audit firms have higher disclosure rates (although they are likely less risky due to more stringent client acceptance standards), but this difference is due to fourth quarter disclosures. Audit firms with Section 404 experience also have greater material weakness disclosure, implying process improvement associated with knowledge sharing across engagements. Collectively, our results shed light on ways to increase the effectiveness of internal control regulation.

Keywords: Internal Controls, Sarbanes-Oxley, Section 302, Section 404, Non-accelerated filers, Auditor Quality, Audit Fees, Micro Auditors, International Regulation, Auditor Involvement

JEL Classification: G34, G38, M49, M41, M45

Suggested Citation

Bedard, Jean C. and Hoitash, Rani and Hoitash, Udi, Evidence from the U.S. on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting (November 3, 2008). International Journal of Auditing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1294389

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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