This study makes important contributions regarding management’s disclosure of material weakness deficiencies. Currently, only audit-related risks are required to be addressed in material weakness deficiency disclosures. However, this study indicates that nonprofessional investors also take non-audit-related risks into consideration when making a financial reporting risk assessment. Managers do have the discretion to provide information about non-related audit risks through nonaudited disclosures. The authors suggest that in doing so managers can mitigate investors’ negative reaction the material weakness from lack of communication.

Asare, S. K., and A. M. Wright. 2017. Inferring Remediation and Operational Risk from Material Weakness Disclosures. Behavioral Research In Accounting. 

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This study provides empirical evidence that suggests that auditor ratification vote tallies are informative to the market. First, higher auditor ratification disapproval is associated with a more negative stock market reaction to the announcement of the vote tallies, consistent with the argument that this reflects negative investor perception of the auditor. Second, the authors provide evidence that the market reacts positively to an auditor change when there is high shareholder disapproval, and that audit and auditor characteristics moderate or exacerbate the market reaction in a way that suggests the market finds the ratification vote informative, but does not fully price it. 

Tanyi, P. N. and K. C. Roland. 2017. Market Reaction to Auditor Ratification Vote Tally. Accounting Horizons 31 (1): 141 – 157. 

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This study provides direct testing of the effects of two forms of CEO social influence pressure on actual CFO’s reporting decisions. Examining such pressures improves the overall understanding of an individual’s decision to engage in dysfunctional behavior, which can inform auditors and audit committee members who provide oversight of the financial reporting process and have responsibility for mitigating the risk of financial misreporting. 

Bishop, C. C., F. T. DeZoort and D. R. Hermanson. 2017. The Effect of CEO Social Influence Pressure and CFO Accounting Experience on CFO Financial Reporting Decisions. Auditing: A Journal of Practice and Theory 36 (1): 21 – 41.

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This study helps to clarify the conditions under which employers are most likely to benefit economically from offering their workers an explicit financial reward for reporting internal misconduct. His cost-benefit analysis reveals that offering a financial reward is likely to be most cost-effective when the existing rate of whistleblowing within the firm is low and least-cost effective when it is high. Furthermore, employers who pay relatively low wages and/or whose workers have weak ethical incentives to report internal misconduct are likely to gain the most economic benefit from offering a reward. 

Stikeleather, B. R. 2016. When do employers benefit from offering workers a financial reward for reporting internal misconduct? Accounting, Organizations and Society 52: 1 – 14. 

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This experiment illustrates the fact that organizations should carefully craft their whistleblower hotline policies so as to minimize the salience of retaliation risk. For example, instead of describing explicit protections from retaliation, the organization could explicitly describe the its commitment to ethical behavior. Furthermore, organizations may wish to publicize successful instances of employee whistleblowing as a means of increasing the availability of instances in which whistleblower retaliation did not occur.

Wainberg, J. and S. Perreault. 2016. Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal? Behavioral Research in Accounting 28 (1): 83-93. 

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