Determinants of Weaknesses in Internal Control Over Financial Reporting
Posted: 1 Nov 2006
We examine determinants of weaknesses in internal control for 779 firms disclosing material weaknesses from August 2002 to August 2005. We find that these firms tend to be smaller, younger, financially weaker, more complex, growing rapidly, or undergoing restructuring. Firms with more serious entity-wide control problems are smaller, younger and weaker financially, while firms with less severe, account-specific problems are healthy financially but have complex, diversified, and rapidly changing operations. Finally, we find that the determinants also vary based on the specific reason for the material weakness, consistent with each firm facing their own unique set of internal control challenges.
Keywords: Internal Control, Material Weakness, Sarbanes-Oxley
JEL Classification: G34, G38, M41, M46, M49
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