Sox 4o4 Assessments and Financial Reporting Errors

23 Pages Posted: 24 Aug 2006

See all articles by Chan Li

Chan Li

University of Pittsburgh - Katz Graduate School of Business

Qian Wang

Iowa State University - College of Business

Date Written: August 2006

Abstract

This paper investigates the usefulness of auditor's adverse SOX Section 404 internal control over financial reporting (ICOFR) opinions as leading indicators of financial reporting errors, which are proxied by subsequent financial report restatements. Consistent with our expectations, we find that companies that receive adverse ICOFR opinions are more likely to report restatements in the future than companies receiving clean ICOFR opinions. This result indicates that adverse ICOFR opinions are "representationally faithful" since they actually are associated with poorer financial controls. We also find subsequent restatements from companies receiving adverse ICOFR opinions have larger net income impacts and involve more account groups. Further analyses of types of internal control material weaknesses suggest both general and specific material weaknesses are positively associated with subsequent restatements. We also investigate whether internal control weaknesses falling into specific COSO categorizations are associated with subsequent restatements.

Keywords: SOX 404, internal control over financial reporting, internal control material weakness, restatement

JEL Classification: M40

Suggested Citation

Li, Chan and Wang, Qian, Sox 4o4 Assessments and Financial Reporting Errors (August 2006). Available at SSRN: https://ssrn.com/abstract=926180 or http://dx.doi.org/10.2139/ssrn.926180

Chan Li (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

Qian Wang

Iowa State University - College of Business ( email )

Ames, IA 50011-2063
United States

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