The Impact of Internal Control Weaknesses on Pension Assumptions Manipulation

51 Pages Posted: 15 Jan 2016 Last revised: 29 Mar 2017

See all articles by Seokyoun Hwang

Seokyoun Hwang

CUNY, College of Staten Island

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Date Written: January 13, 2016

Abstract

This study examines the effect of internal control weaknesses (ICWs) on managers’ choice of pension assumptions, using data disclosed under Sarbanes-Oxley Section 404 from 2004 to 2012. We hypothesize that firms with ICWs are better able to opportunistically set pension assumptions, such as the expected rate of return (ERR) and the discount rate (DR), which in turn help to report higher earnings or healthier balance sheets. First, we find that firms tend to report higher ERR and DR when they receive an adverse audit opinion on internal control. In addition, we find that the firms facing more incentives to manage the funding status of pension plan are likely to choose higher DR in response to the incentives. Next, we find that firms with ICWs are more likely to adjust their biased ERR when they receive an unqualified audit opinion on internal control. Finally, we find that market returns are significantly negative for the firms assuming higher ERR in the 3-day window around the disclosure of material weaknesses if the firms’ earnings are sensitive to the changed ERR.

Keywords: pension assumptions, discount rate, expected rate of return, earnings management, internal control weaknesses

JEL Classification: M41

Suggested Citation

Hwang, Seokyoun and Sarath, Bharat Sarrukai, The Impact of Internal Control Weaknesses on Pension Assumptions Manipulation (January 13, 2016). 2016 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2715182 or http://dx.doi.org/10.2139/ssrn.2715182

Seokyoun Hwang (Contact Author)

CUNY, College of Staten Island ( email )

School of Business 3N 227
2800 Victory Blvd
New York, NY 13104
United States
301-300-2007 (Phone)

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
33
Abstract Views
674
PlumX Metrics