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Determinants of Weaknesses in Internal Control over Financial Reporting

Journal of Accounting and Economics, Vol. 44, pp.193-223, 2007

49 Pages Posted: 8 Aug 2005 Last revised: 10 Mar 2010

Jeffrey T. Doyle

Utah State University

Weili Ge

University of Washington - Michael G. Foster School of Business

Sarah E. McVay

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: May 15, 2006

Abstract

We examine determinants of internal control deficiencies using a sample of 779 firms disclosing material weaknesses from August 2002 to August 2005. We find that material weaknesses in internal control are more likely for firms that are smaller, younger, financially weaker, more complex, growing rapidly, or undergoing restructuring. We next investigate whether these determinants differ based on whether the problem is at the transaction-level or is a more serious company-level problem. We find that firms with more serious entity-wide control problems are smaller, younger and weaker financially, while firms with account-specific problems tend to be healthy financially, but have complex, diversified, and rapidly changing operations. We also provide evidence that the determinants vary based on the specific reason for the material weakness. For example, firm size and age are strong determinants of staffing issues, consistent with each firm facing their own unique set of internal control challenges.

Keywords: Internal Control; Material Weakness; Sarbanes-Oxley

JEL Classification: G34, M41, M46

Suggested Citation

Doyle, Jeffrey T. and Ge, Weili and McVay, Sarah E., Determinants of Weaknesses in Internal Control over Financial Reporting (May 15, 2006). Journal of Accounting and Economics, Vol. 44, pp.193-223, 2007. Available at SSRN: https://ssrn.com/abstract=770465

Jeffrey T. Doyle

Utah State University ( email )

College of Business
Logan, UT 84322-3540
United States

Weili Ge

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Sarah E. McVay (Contact Author)

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

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