The Discovery and Reporting of Internal Control Deficiencies Prior to Sox-Mandated Audits

44 Pages Posted: 7 Apr 2005

See all articles by Hollis Ashbaugh Skaife

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis

Daniel W. Collins

University of Iowa - Department of Accounting

William R. Kinney, Jr.

University of Texas at Austin - Department of Accounting

Date Written: February 28, 2006

Abstract

This paper uses firms' disclosures of internal control problems prior to audits mandated by Section 404 of the Sarbanes-Oxley Act (SOX) to investigate the economic factors that expose firms to internal control failure risks and managements' incentives to discover and report internal control deficiencies (ICDs). We find that firms making pre-SOX 404 ICD disclosures typically have more complex operations, recent changes in organization structure, more accounting risk exposure, fewer resources to invest in internal control and higher incidence of auditor resignation relative to firms that do not report internal control problems. Regarding incentives to discover and report internal control problems, we find that ICD firms have more prior SEC enforcement actions and restatements of financial statements, are more likely to use a dominant audit firm, and are more likely to have concentrated institutional ownership. Our findings are important in developing expectations about determinants of internal control problems across all SEC registrants including non-accelerated filers that are not yet required to comply with SOX 404, as well as providing baseline evidence for evaluating the discovery and reporting of ICDs under mandated internal control audits.

Keywords: Internal Control Deficiencies, Sarbanes-Oxley Act, Financial Reporting Quality

JEL Classification: G14, M41, M43, G34, G38

Suggested Citation

Skaife, Hollis Ashbaugh and Collins, Daniel W. and Kinney, William, The Discovery and Reporting of Internal Control Deficiencies Prior to Sox-Mandated Audits (February 28, 2006). McCombs Working Paper No. ACC-02-05. Available at SSRN: https://ssrn.com/abstract=694681 or http://dx.doi.org/10.2139/ssrn.694681

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis ( email )

Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

William Kinney

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-3632 (Phone)
512-471-3904 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
2,787
Abstract Views
24,219
rank
4,165
PlumX Metrics