How Effective is Internal Control Reporting Under SOX 404? Determinants of the (Non-)Disclosure of Existing Material Weaknesses

Journal of Accounting Research, Vol. 50 No. 3, June 2012

45 Pages Posted: 3 Nov 2011 Last revised: 7 Jan 2013

See all articles by Sarah C. Rice

Sarah C. Rice

Texas A&M University - Mays Business School

David P. Weber

University of Connecticut - Department of Accounting

Date Written: November 2, 2011

Abstract

We study determinants of internal control reporting decisions during the SOX 404 era using a sample of restating firms whose original misstatements are linked to underlying control weaknesses. We find that only a minority of these firms acknowledge their existing control weaknesses during their misstatement periods, and that this proportion has declined over time. Further, the probability of reporting existing weaknesses is negatively associated with external capital needs, firm size, non-audit fees, and the presence of a large audit firm; it is positively associated with financial distress, auditor effort, previously reported control weaknesses and restatements, and recent auditor and management changes. These results provide evidence that detection and disclosure incentives play a role in whether existing material weaknesses are reported, which has implications for the effectiveness of SOX 404 in providing investors with advance warning of potential accounting problems.

Keywords: Internal control reporting, SOX 404, restatements

JEL Classification: M41

Suggested Citation

Rice, Sarah C. and Weber, David P., How Effective is Internal Control Reporting Under SOX 404? Determinants of the (Non-)Disclosure of Existing Material Weaknesses (November 2, 2011). Journal of Accounting Research, Vol. 50 No. 3, June 2012. Available at SSRN: https://ssrn.com/abstract=1953536

Sarah C. Rice

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

David P. Weber (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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