The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality

52 Pages Posted: 6 Jun 2006

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

Ryan LaFond

Algert Global, LLC

Date Written: July 23, 2007

Abstract

This paper investigates the effect of internal control deficiencies and their remediation on accrual quality. We first document that firms reporting internal control deficiencies have lower quality accruals as measured by accrual noise and absolute abnormal accruals relative to firms not reporting internal control problems. Second, we find that firms that report internal control deficiencies have significantly larger positive and larger negative abnormal accruals relative to control firms. This finding suggests internal control weaknesses are more likely to lead to unintentional errors that add noise to accruals than intentional misstatements that bias earnings upward. Third, we document that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems. Finally, we find firms that receive different internal control audit opinions in successive years exhibit changes in accrual quality consistent with changes in internal control quality. Collectively, our cross-sectional and inter-temporal change tests provide strong evidence that the quality of internal control affects the quality of accruals.

Keywords: accrual quality, internal control, auditing

JEL Classification: G34, M41, M43, M49, G38

Suggested Citation

Skaife, Hollis Ashbaugh and Collins, Daniel W. and Kinney, William and LaFond, Ryan, The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality (July 23, 2007). Available at SSRN: https://ssrn.com/abstract=906474 or http://dx.doi.org/10.2139/ssrn.906474

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)

Ryan LaFond

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

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