Earnings Management and Instances of Material Weaknesses Reported Under Sections 302 and 404

Asia-Pacific Journal of Accounting & Economics, Forthcoming

39 Pages Posted: 7 Apr 2019 Last revised: 7 Jul 2020

Date Written: March 11, 2019

Abstract

Sections 302 and 404 of the 2002 Sarbanes-Oxley Act require firms to disclose material weaknesses (MWs) in internal controls. We investigate the association of single and multiple instances of MWs with earnings management. Multiple instances are positively associated with earnings management for Section 302 and 404 firms, whereas single instances have no such association for either firm type. Thus, MWs that are not remediated within one quarter or year tend to be positively associated with earnings management and, in particular, with income- decreasing earnings management. Multiple instances of MWs for such firms can therefore provide critical information for auditors and investors.

Keywords: Internal control weakness, material weakness, earnings management, Sarbanes-Oxley Act, multiple disclosures

JEL Classification: G30, G39, M41, M42, M49

Suggested Citation

Kwon, Shin Hyoung and Deshmukh, Ashutosh, Earnings Management and Instances of Material Weaknesses Reported Under Sections 302 and 404 (March 11, 2019). Asia-Pacific Journal of Accounting & Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3352272 or http://dx.doi.org/10.2139/ssrn.3352272

Shin Hyoung Kwon (Contact Author)

Hanyang University ERICA ( email )

55 Hanyangdaehak-ro, Sangnok-gu
Ansan, Gyeonggi-do 15588
Korea, Republic of (South Korea)

Ashutosh Deshmukh

Independent

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