Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency

39 Pages Posted: 6 Dec 2009 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

Kim Westermann

Bentley University

Date Written: June 9, 2011

Abstract

This paper investigates remediation of Sarbanes-Oxley Section 404 material weaknesses (MWs). Prior research examines full remediation of all MWs or broad categories thereof. We build on these studies by investigating remediation of specific types of MW, thus measuring progress in improving controls made by companies that have not fully remediated all problems. Specifically, we investigate whether specific MW types differ in remediation likelihood and in the association of remediation with earnings quality. Results show that remediation rates of specific MW types vary, and that remediation of specific types is differentially associated with resource availability and corporate governance quality. We also find that remediation of some MW types is significantly associated with changes in abnormal accruals (e.g., entity-level problems in reconciliation and information technology, along with account-specific problems in revenue and tax). Finally, results show that problems remaining unremediated for two years are significantly associated with increased abnormal accruals, regardless of type.

Keywords: Sarbanes-Oxley Section 404, Internal control, Material weakness, Remediation

JEL Classification: M41

Suggested Citation

Bedard, Jean C. and Hoitash, Rani and Hoitash, Udi and Westermann, Kim, Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency (June 9, 2011). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1518544

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)

Kim Westermann

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

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