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    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 
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    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.

    Keywords:
    Material weaknesses; internal controls; remediation; Sarbanes-Oxley Act
    Purpose of the Study:

    This paper looks at firms that have disclosed a material weakness in their internal control systems and compares firms that remediate the weakness by the next reporting period to those that do not. Specifically, the paper explores the characteristics of firms that do not remediate and the consequences those firms face.

    Design/Method/ Approach:

    The authors use data from Audit Analytics to identify firms that report a material weakness in 2006 and then match those firms to Compustat and I/B/E/S databases to ensure that firms which lack the data necessary to compare firms that remediate to firms that do not are dropped from the sample.

    Findings:

    The main results of this study pertain to (1) characteristics of firms that do not remediate and (2) consequences to not remediating and are as follows:

    Firms do not remediate when:

    • The problem is more pervasive
    • When their operations are more complex

    Firms that do not remediate are more likely to face (among other things):

    • Increased audit feeds
    • Increased risk of auditor resignation
    • Increased cost of equity capital
    Category:
    Internal Control
    Sub-category:
    Assessing Material Weaknesses, Reporting Material Weaknesses
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