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
Date Written: May 15, 2006
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: Suggested Citation