To Combine or Not to Combine? Integrated Audit Reporting and Internal Control Material Weakness Opinions

64 Pages Posted: 15 Apr 2022

See all articles by Keval Amin

Keval Amin

Stony Brook University

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Justin Short

University of Tennessee - Haslam College of Business

Date Written: April 2022

Abstract

Large public companies are required to obtain integrated audits of internal control over financial reporting and financial statements. The lack of guidance regarding how auditors should decide whether to issue combined versus separate reports on these audits suggests that these decisions are perceived as largely benign, but it is unclear whether this is the case. We find that separate audit reports are significantly more likely when clients receive material weakness opinions (MWOs), effectively decoupling details about factors giving rise to the MWO and the financial statement audit report. Cross-sectional tests reveal that the negative association between MWOs and combined audit reports is more pronounced in the presence of poor monitoring – when the client has a lower proportion of institutional investors and is more economically important to the auditor. It is weaker in the presence of strong monitoring – when there is more accounting expertise on the client’s audit committee, when the client engages a Big 4 auditor, and when the auditor is an industry specialist. We also find that Big 4 and industry specialist auditor decisions to combine audit reports in MWO years signal higher client misstatement risk. Lastly, for clients that already receive separate reports prior to a MWO, we find that the two reports are less proximate and are less likely to be adjacent in MWO year filings relative to the preceding year’s non-MWO filing. Collectively, these results suggest that client management strategically influences the audit report format. Our findings should be of interest to academics, practitioners, and regulators, and suggest that additional guidance surrounding combined versus separate reporting may be helpful.

Keywords: integrated audits, strategic disclosure, material weakness, audit opinion, auditor reporting, misstatement risk, investor sophistication, client importance, auditor independence, audit committee expertise, audit quality

JEL Classification: M4, M40

Suggested Citation

Amin, Keval and Myers, Linda A. and Short, Justin, To Combine or Not to Combine? Integrated Audit Reporting and Internal Control Material Weakness Opinions (April 2022). Available at SSRN: https://ssrn.com/abstract=4074860 or http://dx.doi.org/10.2139/ssrn.4074860

Keval Amin

Stony Brook University ( email )

John S. Toll Drive
Stony Brook, NY 11794
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Justin Short

University of Tennessee - Haslam College of Business ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

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