Internal Control Deficiency Disclosures Among Chinese Reverse Merger Firms

32 Pages Posted: 9 Sep 2016

See all articles by Juan Mao

Juan Mao

University of Texas at San Antonio - Department of Accounting

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Date Written: September 2016

Abstract

In recent years, financial reporting problems among Chinese reverse merger firms (CRMs), listed on US exchanges, have attracted unfavourable attention from regulators, investors, and the business press. Under the Sarbanes‐Oxley Act of 2002 (SOX), managers' Section 302 assessments of internal control over financial reporting are intended to provide investors with early warning about the likelihood of current and future non‐GAAP financial reporting problems. We investigate managers' propensity to issue unfavourable SOX 302 reports when internal control problems exist. We find that managers of CRMs have equal or greater propensity to issue adverse SOX 302 reports when serious internal control problems exist in the current quarter than those of control firms listed on US exchanges, including reverse merger and initial public offering (IPO) firms from the US and other countries as well as Chinese IPO firms. Furthermore, managers of CRMs also have an equal or greater propensity to issue adverse SOX 302 reports when internal control problems are not known to exist. One reasonable conclusion is that CRM firms tend to have weaker internal controls than comparison groups, and CRM firms are forthcoming in disclosing such weakness. Finally we analyze the specific nature of internal control deficiencies disclosed by each category of our sample firms.

Keywords: Chinese reverse mergers, Disclosure controls, Foreign IPOs, Internal control weakness, SOX 302

Suggested Citation

Mao, Juan and Ettredge, Michael L., Internal Control Deficiency Disclosures Among Chinese Reverse Merger Firms (September 2016). Abacus, Vol. 52, Issue 3, pp. 441-472, 2016. Available at SSRN: https://ssrn.com/abstract=2836731 or http://dx.doi.org/10.1111/abac.12087

Juan Mao (Contact Author)

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8305 (Phone)

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

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