The Role of the Internal Audit Function in the Disclosure of Material Weaknesses

48 Pages Posted: 20 Apr 2010

See all articles by Shu Lin

Shu Lin

California State University, Fresno - Craig School of Business

Mina Pizzini

Texas State University, San Marcos - College of Business Administration

Mark E. Vargus

University of Texas at Dallas - Department of Accounting & Information Management

Indranil Bardhan

University of Texas at Dallas

Date Written: March 19, 2010

Abstract

This study investigates the role that a firm’s internal audit function (IAF) plays in the disclosure of material weaknesses reported under Section 404 of the Sarbanes-Oxley Act of 2002 (U.S. Congress 2002). Using data from 214 firms, we examine the relation between material weakness (MW) disclosures and various IAF attributes and activities. Our results indicate that MW disclosures are negatively associated with the education level of the IAF and the extent to which the IAF incorporates quality assurance techniques into fieldwork, audits activities related to financial reporting, and monitors the remediation of previously identified control problems. The timing of Section 404 work and the nature of follow-up monitoring suggests that these aspects of IAF quality help prevent MWs from occurring. We find that MW disclosures are positively associated with the IAF practice of grading audit engagements and external-internal auditor coordination, suggesting that these activities increase the effectiveness of Section 404 compliance processes.

Suggested Citation

Lin, Shu and Pizzini, Mina and Vargus, Mark E. and Bardhan, Indranil, The Role of the Internal Audit Function in the Disclosure of Material Weaknesses (March 19, 2010). Available at SSRN: https://ssrn.com/abstract=1592593 or http://dx.doi.org/10.2139/ssrn.1592593

Shu Lin

California State University, Fresno - Craig School of Business ( email )

Fresno, CA 93740
United States
559-278-5121 (Phone)
559-278-6931 (Fax)

Mina Pizzini (Contact Author)

Texas State University, San Marcos - College of Business Administration ( email )

San Marcos, TX 78666
United States

Mark E. Vargus

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)

Indranil Bardhan

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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