Business Strategy and Internal Control Over Financial Reporting

46 Pages Posted: 31 Jul 2015 Last revised: 2 Aug 2017

See all articles by Kathleen A. Bentley-Goode

Kathleen A. Bentley-Goode

The University of New South Wales (UNSW) - School of Accounting

Nathan J. Newton

Florida State University

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: August 16, 2016

Abstract

This study examines whether a company’s business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and the quality of auditors’ attestation reports concerning ICFR. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors’ internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies’ internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients.

Keywords: business strategy, internal control, material weakness, Sarbanes-Oxley, Auditing Standard No. 5

JEL Classification: D21, L21, M41

Suggested Citation

Goode, Kathleen Ann Bentley and Newton, Nathan J. and Thompson, Anne, Business Strategy and Internal Control Over Financial Reporting (August 16, 2016). Available at SSRN: https://ssrn.com/abstract=2637688 or http://dx.doi.org/10.2139/ssrn.2637688

Kathleen Ann Bentley Goode

The University of New South Wales (UNSW) - School of Accounting ( email )

Sydney, NSW 2052
Australia
+61 2 9385 6930 (Phone)
+61 2 9385 5925 (Fax)

Nathan J. Newton (Contact Author)

Florida State University ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

HOME PAGE: http://https://business.fsu.edu/person/nate-newton

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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