Restatement of 404 Internal Control Opinions

54 Pages Posted: 14 Nov 2015 Last revised: 26 Nov 2016

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Lili Sun

University of North Texas - Department of Accounting

Date Written: October 28, 2016

Abstract

This paper investigates internal control restatements, i.e., companies and their auditors restating Section 404 internal control (IC) opinions from clean to adverse, after announcing financial statement restatements. We compare IC restatement companies with both companies that issue adverse IC opinions originally (initial ICMW companies) and companies that do not restate their prior period clean IC opinions after a financial statement restatement (no-IC restatement companies). We find that IC restatement companies are associated with lower likelihood of CFO and auditor turnover than the initial ICMW and no-IC restatement companies. Our cross-sectional analyses show that the low CFO and auditor turnover is mainly driven by IC restatement companies remediating ICMWs promptly, having transparent reporting practices and low earnings management incentives. Our results indicate that it is important for studies examining IC issues to distinguish between IC material weaknesses disclosed through IC restatements from those disclosed through original IC opinions.

Keywords: financial statement restatement; Internal control restatement; Section 404 opinions; turnover

JEL Classification: M41

Suggested Citation

Feng, Mei and Li, Chan and Raghunandan, Kannan and Sun, Lili, Restatement of 404 Internal Control Opinions (October 28, 2016). Available at SSRN: https://ssrn.com/abstract=2690035 or http://dx.doi.org/10.2139/ssrn.2690035

Mei Feng

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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