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

See all articles by Hun-Tong Tan

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Yao Yu

University of Massachusetts Amherst - Isenberg School of Management

Date Written: March 1, 2018

Abstract

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

Tan, Hun-Tong and Yu, Yao, Management's Responsibility Acceptance, Locus of Breach, and Investors’ Reactions to Internal Control Reports (March 1, 2018). The Accounting Review, November 2018, Vol. 93, No. 6, pp. 331-355., Available at SSRN: https://ssrn.com/abstract=3050524 or http://dx.doi.org/10.2139/ssrn.3050524

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University ( email )

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

Yao Yu (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

121 Presidents Dr
Amherst, MA 01003-4910
United States
413.545.7615 (Phone)
413.545.3858 (Fax)

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