The Effect of Voluntary Internal Control Audits on the Cost of Capital

54 Pages Posted: 4 Jan 2011 Last revised: 14 Nov 2013

Cory A. Cassell

University of Arkansas

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Jian Zhou

University of Hawaii at Manoa

Date Written: June 1, 2013

Abstract

In this paper, we investigate whether companies that voluntarily have their internal controls audited by an external auditor enjoy a lower cost of capital. Using a sample of companies that voluntarily have their internal controls audited by an external auditor and a control group of companies that report on the strength of internal controls but do not have management’s internal control assertions audited, we first model the determinants of voluntary internal control audits. We find that companies issuing equity or debt and those with stronger monitoring mechanisms (i.e., Big 4 auditors and higher institutional ownership) are more likely to voluntarily purchase internal control audits. Next, we test whether companies that voluntarily purchase internal control audits enjoy a lower cost of capital relative to companies that do not purchase internal control audits and find that the cost of equity and the cost of debt capital are significantly lower for those companies choosing to have their internal controls audited. Our findings are important because they demonstrate an important benefit that small companies can derive from purchasing internal control audits.

Keywords: Sarbanes-Oxley Act Section 404, internal control, cost of capital, voluntary audit, voluntary disclosure, non-accelerated filers

JEL Classification: M41

Suggested Citation

Cassell, Cory A. and Myers, Linda A. and Zhou, Jian, The Effect of Voluntary Internal Control Audits on the Cost of Capital (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=1734300 or http://dx.doi.org/10.2139/ssrn.1734300

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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