Mandatory Management Disclosure and Mandatory Independent Audit of Internal Controls: Evidence of Configural Information Processing by Investors

67 Pages Posted: 8 Dec 2016

See all articles by Khim Kelly

Khim Kelly

University of Central Florida

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Date Written: December 1, 2016

Abstract

We conduct an experiment where alumni participants from a Canadian accounting and finance undergraduate program assume they are in one of four regulatory regimes (manipulated between-subjects) and make investment potential evaluations for two firms (manipulated within-subjects): a firm disclosing no material weaknesses (No-MW disclosure firm) and a firm disclosing material weaknesses (MW disclosure firm) in internal controls over financial reporting (ICFR). We find evidence of configural information processing. For the No-MW disclosure firm, mandatory (versus voluntary) disclosure of ICFR material weaknesses and mandatory (versus voluntary) independent ICFR audit are substitutes in enhancing investment potential evaluations. However, for the MW disclosure firm, neither mandatory disclosure nor mandatory audit has any effect on investment potential evaluations. Supplementary experiments with undergraduate participants suggest that the pattern of configural information processing is a function of participants’ knowledge of company disclosure incentives and the assurance value of an audit, wherein undergraduates with lower levels of knowledge are less able to perceive the effects of mandatory disclosure and mandatory audit on investment potential evaluations. Our findings have implications for regulators who are concerned about balancing the costs and benefits of different regulatory mechanisms.

Keywords: Internal Controls over Financial Reporting; Mandatory Management Disclosure; Mandatory Independent Audit; Configural Information Processing

Suggested Citation

Kelly, Khim and Tan, Hun-Tong, Mandatory Management Disclosure and Mandatory Independent Audit of Internal Controls: Evidence of Configural Information Processing by Investors (December 1, 2016). Available at SSRN: https://ssrn.com/abstract=2881492 or http://dx.doi.org/10.2139/ssrn.2881492

Khim Kelly (Contact Author)

University of Central Florida ( email )

12744 Pegaus Dr
Orlando, FL 32816
United States

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

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