Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002
Tóm tắt
We examine the stock price reaction to management’s disclosure of internal control weaknesses under §302 of the Sarbanes Oxley Act and to the characteristics of these weaknesses, controlling for other material announcements in the event window. We find that some characteristics of the weaknesses—their severity, management’s conclusion regarding the effectiveness of the controls, their auditability, and the vagueness of the disclosures—are informative. We also find that the information content of internal control weakness disclosures depends on the severity of the internal control weakness. Moreover, in a sub-sample uncontaminated by other announcements in the event window, we find negative price reactions to the disclosure of internal control weaknesses and material weaknesses.
Tài liệu tham khảo
Ashbaugh-Skaife, H., Collins, D., & Kinney, W. (2007). The discovery and reporting of internal control deficiencies prior to SOX-mandated audits. Journal of Accounting and Economics, forthcoming.
Becker, C. L., DeFond, M. L., Jiambalvo, J. J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15, 1–24.
Beneish, M. D., Billings, M., & Hodder, L. (2006). Internal control weaknesses and information uncertainty. Working paper, Indiana University.
Berkman, H., & Truong, C. (2006). Event day 0? After-hours earnings announcements. Working paper, Massey University and University of Auckland.
Charles River Associates. (2005). Sarbanes Oxley Section 404 costs and remediation of deficiencies: Estimates from a sample of Fortune 1000 companies. April, 2005.
Craswell, A. T., Francis, J. R., & Taylor, S. L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20, 297–322.
Cready, W. M., & Hurtt, D. N. (2002). Assessing investor response to information events using return and volume metrics. The Accounting Review, 77, 891–909.
Credit Suisse First Boston. (2005). Section 404: Now appearing in 10-Ks near you. March 11, 2005.
Davidson, R. A., & Neu, D. (1993). A note on the association between audit firm size and audit quality. Contemporary Accounting Review, 9, 479–488.
DeFond, M. L., & Jiambalvo, J. (1993). Factors related to auditor-client disagreements over income-increasing accounting methods. Contemporary Accounting Research, 9, 415–431.
De Franco, G., Guan, Y., & Lu, H. (2005). The wealth change and redistribution effects of Sarbanes-Oxley internal control disclosures. Working paper, University of Toronto.
Doss, M. (2004). Section 404 reports on internal control: Impact on ratings will depend on nature of material weaknesses reported. Moody’s Investors Service. G. Jones, Ed. October, 2004.
Doyle, J., Ge, W., & McVay, S. (2007a). Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics, forthcoming.
Doyle, J., Ge, W., & McVay, S. (2007b). Accruals quality and internal control over financial reporting. The Accounting Review, forthcoming.
Francis, J. R., & Ke, B. (2006). Disclosure of fees paid to auditors and the market valuation of earnings surprises. Review of Accounting Studies, 11, 495–523.
Francis, J. R., & Krishnan, J. (1999). Accounting accruals and auditor reporting conservatism. Contemporary Accounting Research, 16, 135–165.
Francis, J. R., Maydew, E. L., & Sparks, H. C. (1999). The role of Big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice and Theory, 18, 17–34.
Ge, W., & McVay, S. (2005). The disclosure of material weaknesses in internal control after the Sarbanes-Oxley Act. Accounting Horizons, 19, 137–158.
Hogan, C. E., & Wilkins, M. S. (2006). Evidence on the audit risk model: Do auditors increase audit effort in the presence of internal control deficiencies? Working paper, Michigan State University and Texas A & M University.
Kothari, S. P., & Warner, J. B. (2007). Econometrics of event studies. In B. E. Eckbo (Ed.), Handbook of Corporate Finance: Empirical Corporate Finance. North Holland: Elsevier.
Myers, J. N., Myers, L. A., & Omer, T. C. (2003). Exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78, 779–799.
Nicolaisen, D. T. (2004). Keynote speech at 11th annual Midwestern financial reporting symposium. Chicago, IL, October 7, 2004.
Noreen, E. W. (1988). An empirical comparison of probit and OLS regression hypothesis tests. Journal of Accounting Research, 26, 119–133.
Noreen, E. W. (1989). Computer intensive methods for testing hypotheses: An introduction. (pp. 1–41). New York: John Wiley & Sons.
Orenstein, E. G. (2004). Sarbanes-Oxley 404: Remediation, communication, education. Financial Executives International, November, 2004. http://www.fei.org/mag/articles/11-2004_compliance.cfm.
Palmrose, Z. (1988). Analysis of auditor litigation and service quality. The Accounting Review, 63, 55–73.
Palmrose, Z.-V., Richardson, V. J., & Scholz, S. (2004). Determinants of market reactions to restatement announcements. Journal of Accounting and Economics, 37, 59–89.
Public Company Accounting Oversight Board (PCAOB). (2004). Auditing Standard No. 2. An audit of internal control over financial reporting performed in conjunction with an audit of financial statements. Washington, DC: PCAOB.
Securities and Exchange Commission (SEC). (2003). Final rule: Management’s reports on internal control over financial reporting and certification of disclosure in Exchange Act periodic reports. Release Nos. 33-8238, 34-47986. August 14. Washington, DC: SEC.
Teoh, S. H., & Wong, T. J. (1993). Perceived auditor quality and the earnings response coefficient. The Accounting Review, 68, 346–366.