Venture Capital and Material Weaknesses in Internal Control

46 Pages Posted: 8 Aug 2015 Last revised: 17 Mar 2017

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Lars Helge Hass

Lancaster University - Management School

Linda A. Myers

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

Monika Tarsalewska

University of Exeter Business School

Date Written: March 15, 2017

Abstract

In this paper, we investigate the association between venture capital (VC) backing and the quality of internal controls. We find that companies with VC backing have fewer material weaknesses in internal control. Moreover, the effect of VC backing is more pronounced for entity-level material weaknesses than for account-level material weaknesses. We also find that material weakness disclosures are more informative if they are disclosed by companies backed by venture capitalists (VCs). Specifically, material weaknesses are more likely to be followed by subsequent financial statement restatements for VC-backed companies than for other companies. Finally, companies backed by more reputable VCs are less likely to receive negative internal control opinions from management or from their external auditors.

Keywords: Venture Capital, Initial Public Offerings, Corporate Governance, Material Weaknesses in Internal Control, Sarbanes-Oxley Act (SOX)

JEL Classification: D01, G24, G34, K4

Suggested Citation

Cumming, Douglas J. and Hass, Lars Helge and Myers, Linda A. and Tarsalewska, Monika, Venture Capital and Material Weaknesses in Internal Control (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2640873 or http://dx.doi.org/10.2139/ssrn.2640873

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Lars Helge Hass

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Linda A. Myers

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

Knoxville, TN
United States

Monika Tarsalewska (Contact Author)

University of Exeter Business School ( email )

XFI building, Streatham Campus
Rennes Drive
Exeter, Devon EX4 4ST
United Kingdom

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