Investor Confidence in Earnings: The Interactive Effects of Internal Control Audits and Manager Legal Liability

Posted: 4 Feb 2011 Last revised: 24 Feb 2011

See all articles by Yi-Jing Wu

Yi-Jing Wu

Texas Tech University - Rawls College of Business

Brad Tuttle

University of South Carolina - Department of Accounting

Date Written: January 31, 2011

Abstract

An underlying objective of the Sarbanes-Oxley Act is to provide investors with reliable information, which presumably should increases investor confidence in financial disclosures. In part to achieve this goal, managers now have personal legal liability for internal control over financial reporting as well as undergo mandated internal control audits (IC Audits). The fundamental assumption is that these two mechanisms produce either additive or synergistic effects on investor behavior. However, this assumption contradicts agency theory, which suggests a pattern of interaction in which each mechanism alone is sufficient. The current study informs this debate by investigating the possible interactive effects of manager liability and IC Audits on investor confidence and its antecedents including managers’ ICFR disclosures. Results of a laboratory experiment suggest that only the IC Audit improves the accuracy of managers’ ICFR disclosures while investor behavior tracks agency theory predictions rather than the assumptions underlying the current regulatory environment.

Keywords: internal control audits, legal liability, investor confidence, stock price reaction

JEL Classification: M42, G18

Suggested Citation

Wu, Yi-Jing and Tuttle, Brad, Investor Confidence in Earnings: The Interactive Effects of Internal Control Audits and Manager Legal Liability (January 31, 2011). Available at SSRN: https://ssrn.com/abstract=1754766

Yi-Jing Wu (Contact Author)

Texas Tech University - Rawls College of Business ( email )

703 Flint Avenue
Lubbock, TX 79409
United States
216-368-8895 (Phone)

Brad Tuttle

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803-777-6639 (Phone)
803-777-6876 (Fax)

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