Management's Responsibility Acceptance, Locus of Breach, and Investors’ Reactions to Internal Control Reports
52 Pages Posted: 10 Oct 2017 Last revised: 21 Jun 2019
Date Written: March 1, 2018
The triangle model of responsibility (Schlenker, Britt, Pennington, Murphy, and Doherty 1994) predicts that the extent that investors hold management responsible for an adverse event is jointly determined by the links among three elements—management, the adverse event, and the relevant accounting regulations/standards or public norms. Applying this theory, we conduct experiments to examine how the locus of breach (external versus internal) moderates the efficacy of management’s responsibility acceptance (higher versus lower). Our results show that management’s higher (versus lower) responsibility acceptance is a more effective strategy in the presence of an external breach, but not in the presence of an internal breach (Experiment 1). Follow-up experiments suggest that this result is driven by the relative strength of the triangle links underlying the external versus internal breaches, rather than the locus per se.
Keywords: Internal Controls Over Financial Reporting, Section 404 Of SOX, Management Explanation, Locus Of Breach, Triangle Model Of Responsibility, Responsibility Assignment
JEL Classification: G40, M41
Suggested Citation: Suggested Citation