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  • Jennifer M Mueller-Phillips
    Material Weakness Remediation and Earnings Quality: A...
    research summary posted October 16, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    Title:
    Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency.
    Practical Implications:

    Combining the remediation and earnings quality analyses, the results imply that investors should be most concerned about MWs in information technology, segregation of duties, account reconciliations, taxation, revenues, and inventory. These types occur frequently and are slow to remediate; thus, their effects on financial reporting linger longer than others. Their link to near-term earnings quality is evident, as their remediation reduces abnormal accruals, and/or their lack of remediation in the following year further increases accruals. In general, these results suggest that financial statement users should adopt a more granular view of remediation, as successful remediation of some specific MWs can signal improvement in the quality of disclosed financial information even if other MWs remain unremediated.

    Citation:

    Bedard, J. C., R. Hoitash, U. Hoitash, and K. Westermann. 2012. Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency. Auditing: A Journal of Practice & Theory 31 (1): 57-78.

  • Jennifer M Mueller-Phillips
    An Analysis of Multiple Consecutive Years of Material...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses 
    Title:
    An Analysis of Multiple Consecutive Years of Material Weaknesses in Internal Control.
    Practical Implications:

    The findings offer three important contributions to the existing literature. First, they indicate that MW reported in multiple consecutive years have a progressively larger and statistically significant negative impact on CE when firms that partially remediate are excluded from the sample. That is, the market notices that some firms are slow to remediate MW, whereas other firms take timely remediation steps to address MW. Second, the study shows that the number and specific types of MW are significant factors in understanding the relation between MW and CE. In fact, even if a firm does not remediate all MW in a given year, the market views favorably a reduction in the number of MW (i.e., partial remediation). Third, given the richness of the dataset, the current study helps to reconcile conflicting results in the prior literature on the effects of MW.

    Citation:

    Gordon, L. A., and A. L. Wilford. 2012. An Analysis of Multiple Consecutive Years of Material Weaknesses in Internal Control. Accounting Review 87 (6): 2027-2060.

  • Jennifer M Mueller-Phillips
    The Role of the Internal Audit Function in the Disclosure of...
    research summary posted March 4, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses 
    Title:
    The Role of the Internal Audit Function in the Disclosure of Material Weaknesses
    Practical Implications:

    Results indicate that the education level of IAF staff and the extent to which the IAF incorporates quality assurance techniques into fieldwork, audits activities related to financial reporting, and monitors the remediation of previously identified control problems are negatively associated with MW disclosures.

    The timing of Section 404 work and the nature of follow-up monitoring suggest that these aspects of IAF quality help prevent the existence of MWs. The IAF practices of grading audit engagements and coordinating with external auditors are both positively associated with MW disclosures. The positive relations suggest that these activities increase the effectiveness of Section 404 compliance processes and thereby increase the likelihood that extant MWs will be detected and disclosed. Together, this study’s results have important implications for managers responsible for determining IAF staffing and the structure of IAF activities, external auditors who perform Section 404 work, and standard-setters who provide Section 404 guidance. Moreover, the evidence that the IAF affects the financial reporting process lends support to the requirement that NYSE-listed companies maintain an internal audit function

    For more information on this study, please contact Shu Lin.

    Citation:

    Lin, S., M. Pizzini, M. Vargus, and I. R. Bardhan. 2011. The Role of the Internal Audit Function in the Disclosure of Material Weaknesses. The Accounting Review 86 (1): 287-323. 

  • Jennifer M Mueller-Phillips
    The Influence of Auditor and Client Section 404 Processes on...
    research summary last edited February 19, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 07.0 Internal Control, 07.04 Assessing Remediation of Weaknesses 
    Title:
    The Influence of Auditor and Client Section 404 Processes on Remediation of Internal Control Deficiencies at All Levels of Severity
    Practical Implications:

    Overall, this study suggests that remediation of detected ICFR problems prior to the balance sheet date is one benefit of Section 404 activity to stakeholders. This study’s finding of lower remediation of auditor-discovered ICDs implies that client personnel missed the control flaw in their own Section 404(a) process, so may lack the expertise to remediate the problem. This calls into question the current policy of relying on Section 404(a) alone for non-accelerated filer (most public companies). Further, this study’s results on client processes imply that the most important factors affecting remediation are not who directly manages the process, but rather the client’s organization of the process in making an early start and coordinating the effort with IT personnel.

    For more information on this study, please contact Jean C. Bedard.

    Citation:

    Graham, L., and J.C. Bedard. 2013. The Influence of Auditor and Client Section 404 Processes on Remediation of Internal Control Deficiencies at All Levels of Severity. Auditing: A Journal of Practice & Theory 32(4): 45-69

  • Jennifer M Mueller-Phillips
    Determinants of the Persistence of Internal Control...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 07.0 Internal Control, 07.04 Assessing Remediation of Weaknesses 
    Title:
    Determinants of the Persistence of Internal Control Weaknesses
    Practical Implications:

    Effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. While credit agencies examine entity-level deficiencies as a possible indicator for downgrading a firm’s rating, account-level deficiencies are associated with long-term effects on internal control as well.

    Consideration of the types of MWs and the specific underlying deficiencies should be important to interested stakeholders: auditors, as they assess and evaluate risk and controls; rating agencies, as they evaluate credit worthiness; investors and analysts, as they evaluate the value of the firm; and management and audit committees, as they consider investments in controls.

    For more information on this study, please contact Marcia Weidenmier Watson.
     

    Citation:

    Klamm, B. K., K. W. Kobelsky, and M. W. Watson. Determinants of the Persistence of Internal Control Weaknesses. Accounting Horizons 26 (2): 307-333.

  • Jennifer M Mueller-Phillips
    Detection and Severity Classifications of Sarbanes-Oxley...
    research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.04 Assessing Remediation of Weaknesses 
    Title:
    Detection and Severity Classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies
    Practical Implications:

    The results of this study support the value of auditor involvement at two stages of the ICFR assessment process (detection and classification), and contribute to understanding of factors associated with client and auditor performance in both stages. The study also provides direct evidence on the “yield” of detection methods used by auditors. This issue is at the heart of the debate on the value of auditor involvement in assessing and testing internal controls. Lastly, the findings of this study imply that the recent exemption of Section 404(b) for smaller U.S. public companies could result in failure to fully realize potential improvements in financial reporting quality in that sector of the market.

    For more information on this study, please contact Jean Bedard.
     

    Citation:

    Bedard, J. C. and L. Graham. 2011. Detection and Severity Classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies.  The Accounting Review 86 (3):  825-855. 

  • Jennifer M Mueller-Phillips
    Changes in Corporate Governance Associated with the...
    research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses, 13.0 Governance, 13.01 Board/Audit Committee Composition 
    Title:
    Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation
    Practical Implications:

    The results of this study support the audit committee regulations under SOX and the board independence regulations of the listing exchanges. These results are important to regulators as they show that improvements in audit committee influence, competence, and incentives are each positively associated with ICMW remediation. In addition, the results reveal that improvements in these audit committee characteristics are most strongly associated with the remediation of ICMWs relating to control activities and monitoring, but not to ICMWs across the other COSO categories. Lastly, the results are important to management as they highlight the importance of hands-on day-to-day leadership by management in addressing situations involving the revelation and remediation of material negative events.

    For more information on this study, please contact Karla Johnstone.
     

    Citation:

    Johnstone, K., C. Li, and K. H. Rupley. 2011. Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation.  Contemporary Accounting Research 28 (1):  331-383. 

  • Jennifer M Mueller-Phillips
    Audit Fees after Remediation of Internal Control Weaknesses
    research summary posted June 22, 2013 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 07.04 Assessing Remediation of Weaknesses, 07.05 Impact of 404 on Fees and Financial Reporting Quality, 12.0 Accountants’ Reports and Reporting, 12.06 Consequences of Adverse 404 Opinions 
    Title:
    Audit Fees after Remediation of Internal Control Weaknesses
    Practical Implications:

    The results of this study are important for companies and regulators that are trying to understand the true costs for firms with an adverse report on internal control. It further informs the continuing debate regarding Section 404 of SOX and provides some evidence that these premiums can be as high as 30 (20) percent in the first(second) year after remediation when compared to firms that only have clean Section 404 reports. Lastly, this provides opportunities for future research investigating how long it takes audit fees to return the level of companies that only receive clean opinions and whether or not this premium relates to additional audit work or a risk premium.

    Citation:

    Munsif, V., K. Raghunandan, D. V. Rama, and M. Singhvi. 2011. Audit Fees after Remediation of Internal Control Weaknesses.  Accounting Horizons 25 (1):  87-105. 

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  • Jennifer M Mueller-Phillips
    The Failure to Remediate Previously Disclosed Material...
    research summary posted June 22, 2013 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.04 Assessing Remediation of Weaknesses 
    Title:
    The Failure to Remediate Previously Disclosed Material Weaknesses in Internal Controls
    Practical Implications:

    These findings are particularly important for CPA firms doing consulting. By better understanding the cost associated with failure to remediate, firms can better negotiate fees and demonstrate the value they add in helping firms to remediate material weaknesses.

    Citation:

    Hammersley, J.S., L.A. Myers and J. Zhou. 2012. The Failure to Remediate Previously Disclosed Material Weaknesses in Internal Controls. Auditing: A Journal of Practice and Theory. (31) 2: 73–111.

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