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Is Operational Control Risk Informative of Undetected Financial Reporting Deficiencies?

50 Pages Posted: 1 Jul 2014 Last revised: 28 Jun 2016

Alastair Lawrence

University of California, Berkeley - Haas School of Business

Miguel Minutti-Meza

University of Miami - School of Business Administration

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: April 30, 2016

Abstract

This study provides evidence concerning the significance of assessing operational control risks as part of an integrative evaluation of internal controls. We examine whether operational control weaknesses can be used as cues to potential unreported financial reporting control weaknesses, and in turn, relate to subsequent financial reporting deficiencies. We find positive relations between operational control weaknesses and future financial reporting control weaknesses, restatements, SEC comment letters, and audit fees, even after controlling for contemporaneous financial reporting control weaknesses. These findings question the completeness and accuracy of regulated assessments of financial reporting control weaknesses, and suggest that operational control risk is informative of potential financial reporting deficiencies.

Keywords: Operational controls; financial reporting quality; audit fees; data breaches

JEL Classification: M41, M43, M49, G34, G38

Suggested Citation

Lawrence, Alastair and Minutti-Meza, Miguel and Vyas, Dushyantkumar, Is Operational Control Risk Informative of Undetected Financial Reporting Deficiencies? (April 30, 2016). Rotman School of Management Working Paper No. 2460882. Available at SSRN: https://ssrn.com/abstract=2460882 or http://dx.doi.org/10.2139/ssrn.2460882

Alastair Lawrence

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://www2.haas.berkeley.edu/Faculty/lawrence_alastair.aspx

Miguel Minutti-Meza (Contact Author)

University of Miami - School of Business Administration ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States
305-284-6287 (Phone)

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
Mississauga, Ontario L5L 1C6
Canada

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