Accruals Quality and Internal Control Over Financial Reporting

Posted: 26 Jan 2007

See all articles by Jeffrey T. Doyle

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

Abstract

We examine the relation between accruals quality and internal controls using 705 firms that disclosed at least one material weakness from August 2002 to November 2005 and find that weaknesses are generally associated with poorly estimated accruals that are not realized as cash flows. Further, we find that this relation between weak internal controls and lower accruals quality is driven by weakness disclosures that relate to overall company-level controls, which may be more difficult to audit around. We find no such relation for more auditable, account-specific weaknesses. We find similar results using four additional measures of accruals quality: discretionary accruals, average accruals quality, historical accounting restatements, and earnings persistence. Our results are robust to the inclusion of firm characteristics that proxy for difficulty in accrual estimation, known determinants of material weaknesses, and corrections for self-selection bias.

Keywords: earnings quality, accruals quality, internal control, material weaknesses

JEL Classification: M41, M43, M49, G34, M45

Suggested Citation

Doyle, Jeffrey T. and Ge, Weili and McVay, Sarah E., Accruals Quality and Internal Control Over Financial Reporting. Accounting Review, October 2007. Available at SSRN: https://ssrn.com/abstract=959295

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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