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Journal articles on the topic 'Internal control material weakness'
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1
Gramling, Audrey, and Arnold Schneider. "Effects of reporting relationship and type of internal control deficiency on internal auditors’ internal control evaluations." Managerial Auditing Journal 33, no. 3 (2018): 318–35. http://dx.doi.org/10.1108/maj-07-2017-1606.
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Purpose This paper aims to explore whether an internal auditor’s evaluation of internal control deficiencies are influenced by the party with primary influence over the internal audit function and by the type of internal control deficiency. Design/methodology/approach A behavioral experiment is conducted with internal auditors as participants in a 2 × 2 between-subjects factorial design. Findings Results indicate that internal auditors are less likely to evaluate a pervasive control deficiency related to “tone at the top” as a material weakness than a process-specific control deficiency. Furthermore, internal auditors are somewhat less likely to evaluate a process-specific internal control deficiency as a material weakness when management has primary influence over the internal audit function than when the audit committee has primary influence. It is also found that the best practice of internal audit oversight (i.e., primary oversight of internal auditors by the audit committee) may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal control. Research limitations/implications Limitations of this research include lack of economic consequences (e.g. future pay and job loss) associated with the internal control decisions made by the participants; less concise information provided to the participants than would generally be available to them; and lack of generalizability of the findings beyond the specific company setting and internal control scenario portrayed in the case materials. Practical implications Not evaluating a pervasive control deficiency related to “tone at the top” as a material weakness seems to not fully align with relevant professional guidance and can possibly result in inaccurate internal information about the quality of internal controls. Furthermore, having an internal auditor’s evaluation of a process-specific internal control deficiency influenced by the party with primary influence over the internal audit function would not appear to align with relevant professional guidance. Finally, primary oversight by the audit committee of the internal auditors may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal controls and, thus, possible communication of inaccurate internal control information. Originality/value This study is the first to address whether the party with primary influence over the internal audit function influences an internal auditor’s evaluation of internal control deficiencies.
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Ge, Weili, and Sarah McVay. "The Disclosure of Material Weaknesses in Internal Control after the Sarbanes-Oxley Act." Accounting Horizons 19, no. 3 (2005): 137–58. http://dx.doi.org/10.2308/acch.2005.19.3.137.
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This paper focuses on a sample of 261 companies that disclosed at least one material weakness in internal control in their SEC filings after the effective date of the Sarbanes-Oxley Act of 2002. Based on the descriptive material weakness disclosures provided by management, we find that poor internal control is usually related to an insufficient commitment of resources for accounting controls. Material weaknesses in internal control tend to be related to deficient revenue-recognition policies, lack of segregation of duties, deficiencies in the period-end reporting process and accounting policies, and inappropriate account reconciliation. The most common account-specific material weaknesses occur in the current accrual accounts, such as the accounts receivable and inventory accounts. Material weakness disclosures by management also frequently describe internal control problems in complex accounts, such as the derivative and income tax accounts. In our statistical analysis, we find that disclosing a material weakness is positively associated with business complexity (e.g., multiple segments and foreign currency), negatively associated with firm size (e.g., market capitalization), and negatively associated with firm profitability (e.g., return on assets).
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Doyle, Jeffrey T., Weili Ge, and Sarah McVay. "Accruals Quality and Internal Control over Financial Reporting." Accounting Review 82, no. 5 (2007): 1141–70. http://dx.doi.org/10.2308/accr.2007.82.5.1141.
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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.
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Bolton, Brian, Qin Lian, Kathleen Rupley, and Jing Zhao. "Industry contagion effects of internal control material weakness disclosures." Advances in Accounting 34 (September 2016): 27–40. http://dx.doi.org/10.1016/j.adiac.2016.07.004.
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Gramling, Audrey A., Edward F. O'Donnell, and Scott D. Vandervelde. "An Experimental Examination of Factors That Influence Auditor Assessments of a Deficiency in Internal Control over Financial Reporting." Accounting Horizons 27, no. 2 (2013): 249–69. http://dx.doi.org/10.2308/acch-50410.
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SYNOPSIS When assessing the effectiveness of internal control over financial reporting (ICFR), auditors evaluate design effectiveness, gather evidence on operating effectiveness, assess operating effectiveness, and conclude whether control deficiencies are material weaknesses. We experimentally examine audit managers' and partners' assessments of ICFR operating effectiveness and judgments of whether a control deficiency is a material weakness to determine the influence of the presence of: (1) a material weakness unrelated to the deficiency being assessed, and (2) a known misstatement associated with the identified control deficiency. Results suggest that the presence of either an unrelated material weakness or a known misstatement influences the assessed operating effectiveness of an internal control and the likelihood of a material weakness assessment. We also provide supplemental survey results from practicing audit managers and partners on their experiences in assessing potential material weaknesses to gain insights into their interpretations of the professional guidance.
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van Ravenstein, Judith, Georgios Georgakopoulos, Petros Kalantonis, and Panagiotis Kaldis. "Does Audit Quality Influence the Relation between Earnings Management and Internal Control Weakness in the Post –SOX Period." International Journal of Sustainable Economies Management 2, no. 2 (2013): 70–100. http://dx.doi.org/10.4018/ijsem.2013040105.
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Material weaknesses in the internal control system of a company create more opportunities for managers to engage in opportunistic earnings management. In this study the authors investigate the relation between earnings management and disclosed material weaknesses in the internal controls, both under SOX 302 and SOX 404, and examine whether audit quality, measured as being audited by a Big Four auditor, has an effect on that relation. The results suggest that material weakness firms have more absolute discretionary accruals and greater income-decreasing discretionary accruals. So evidence is provided that material weakness firms engage in more earnings management, however not in opportunistic income-increasing earnings management. When audit quality is high, measured as being audited by a Big Four auditor, the disclosed material weaknesses are lower just as total and absolute discretionary accruals are. It is also interesting in our findings that when material weakness firms are audited by a Big Four auditor a positive relationship seems to exist with discretionary accruals, suggesting that when a firm is audited by a Big Four auditor, material weaknesses in the internal controls will lead to opportunistic earnings management.
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Lai, Shu-Miao, Chih-Liang Liu, and Sheng-Syan Chen. "Internal Control Quality and Investment Efficiency." Accounting Horizons 34, no. 2 (2020): 125–45. http://dx.doi.org/10.2308/horizons-12-148.
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SYNOPSIS We investigate whether the quality of internal control over financial reporting (ICOFR) has implications for the quality of internal control over fixed assets by examining the relation between material weaknesses (MWs) and investment efficiency. After excluding restating firms and controlling for externally reported earnings quality and the potential endogeneity of material weakness disclosure, we find that managers in firms with weak ICOFR are more likely to make inefficient investments. This relation is stronger when investment-specific MWs are related to capital expenditure and property, plant, and equipment. We further show a significantly negative relation between future cash flows and investments made by firms with weak ICOFR. Overall, our findings are distinct from prior studies in that they are independent of financial reporting quality and suggest that weak ICOFR implies that internal controls over fixed assets failed as well. Data Availability: Data are available from public sources identified in the paper.
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Hong, Siwoon, and Jong Eun Lee. "Internal Control Weakness and Stock Price Crash Risk." Journal of Applied Business Research (JABR) 31, no. 4 (2015): 1289. http://dx.doi.org/10.19030/jabr.v31i4.9302.
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Considering that stock price crashes are positively associated with opaque financial reporting and that effective internal control over financial reporting is essential for reliable and transparent financial reporting, it is thus vital to establish and maintain effective internal control over financial reporting. In this paper, we investigate the impact of internal control weakness on stock price crash risk, using the disclosures under Section 404 of the 2002 SarbanesOxley Act. We find that material weakness in internal control over financial reporting increases information asymmetry by producing unreliable and/or opaque financial reporting, subsequently resulting in a stock price crash. Our study provides evidence that ineffective internal control over financial reporting is an indicator of future stock price crashes.
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Xu, Li, and Alex P. Tang. "Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation." Review of Quantitative Finance and Accounting 39, no. 1 (2011): 27–53. http://dx.doi.org/10.1007/s11156-011-0243-2.
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Hansen, Victoria J. "The Unintended Consequences of Internal Controls Reporting on Tax Decision Making." Journal of the American Taxation Association 42, no. 1 (2019): 83–102. http://dx.doi.org/10.2308/atax-52514.
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ABSTRACT This study investigates the impact of the internal controls over financial reporting requirements (ICFR) on the decision making of corporate tax executives. I examine tax executives' decisions to disclose an internal control deficiency by amending a prior year return when the internal control deficiency will be classified as either a significant deficiency or a material weakness. I also examine if tax executives' decisions are impacted by whether amending results in a refund or additional tax due. I find tax executives are less likely to disclose (amend) when the internal control deficiency is classified as a material weakness. When facing a material weakness, 16.7 percent choose not to disclose. Tax executives are also less likely to disclose (amend) when amending results in additional tax due. These results indicate the ICFR requirements may have unintended consequences. If executives do not disclose internal control deficiencies, the reliability of financial reporting is limited.
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Raghunandan, K., and Dasaratha V. Rama. "SOX Section 404 Material Weakness Disclosures and Audit Fees." AUDITING: A Journal of Practice & Theory 25, no. 1 (2006): 99–114. http://dx.doi.org/10.2308/aud.2006.25.1.99.
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Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).
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Jaehong, Lee, Cho Eunjung, and Choi Hyunjung. "The Effect Of Internal Control Weakness On Investment Efficiency." Journal of Applied Business Research (JABR) 32, no. 3 (2016): 649–62. http://dx.doi.org/10.19030/jabr.v32i3.9648.
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This paper examines whether material weakness in internal accounting control is negatively associated with investment efficiency in Korea. Since internal accounting control weakness drives poor accounting quality and poor accounting quality exacerbates information asymmetry between firms and outside capital suppliers, managerial investment cannot be monitored effectively which result in over- and/or under- investment. Since internal accounting system is closely related to corporate governance, weak internal accounting control is often associated with poor corporate governance, and this control environment makes it hard to monitor managerial opportunistic behavior, causing abnormal investment such as over- and/or under- investment. We find that firms with internal accounting control weakness tend to make over- and under- investment. We also find the number of weakness in internal accounting control is negatively related to investment efficiency. In addition, three types of qualified review opinion - overall company level weakness, account-specific weakness and disclaimer review opinion due to scope limitation - are differentially affected to investment efficiency; disclaimer review opinion is present the most severe problem in internal accounting control that drives over- and under- investment. Our findings suggest weak internal accounting control provides poor monitoring to manager and cannot restrain managerial inefficient investment decision.
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Salehi, Mahdi, and Fatemeh Ghasempour. "Material internal control weakness with intangible assets, capital structure and commercial risk." Management Research Review 44, no. 7 (2021): 1059–82. http://dx.doi.org/10.1108/mrr-06-2020-0335.
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Purpose This study aims to assess the influence of material internal control weaknesses (ICWs) on investment in intangible assets, capital structure and commercial risk of organizations. Also, it analyses the impact of investment in intangible assets on the presence of material ICWs. This paper expects that ICWs and investment in intangible assets are interactively incorporated. Design/methodology/approach The statistical population of this study includes listed firms on the Tehran Stock Exchange during 2012-2017, selected using the systematic elimination method. A total of 588 firms is selected as the final sample of the study. Four hypotheses are developed to meet the study’s objectives and data analysis is carried out using the panel data method in Stata Software. Findings Results show that material ICWs have a positive and significant impact on investment in intangible assets and financial leverage. Moreover, this study finds that investment in intangible assets deteriorates the ICWs’ degree. However, the findings show no significant relationship between ICWs and commercial risks of companies. Originality/value The current study fills the gap in the literature science; there is no evidence on the subject of the study.
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Chung, Hyeesoo (Sally), Sudha Krishnan, John Lauck, and Jinyoung Wynn. "Market reactions to the internal control reporting presentation format: combined vs separate audit reports." Managerial Auditing Journal 36, no. 7 (2021): 979–98. http://dx.doi.org/10.1108/maj-12-2020-2951.
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PurposeThis paper aims to investigate whether the stock market reacts to presentation options available to auditors under AS 2 (providing separate financial statement audit and internal control over financial reporting [ICOFR] audit reports, or presenting a combined report with both audit opinions). Design/methodology/approachDrawing on psychology theory, the authors hypothesize that presenting material weaknesses in ICOFR with an unqualified financial statement audit in a combined report effectively dilutes the weight placed on the material weaknesses perceived by investors. The authors further hypothesize the presentation format effect to vary by type of material weaknesses since some material weaknesses are considered more serious than others. The authors examine ICOFR and audit reporting and cumulative abnormal return data from 2007 to 2017 using two-stage least squares regression analysis. FindingsThe results show that a combined report of ineffective ICOFR and unqualified financial statement audit reduces the negative impact of material weakness disclosures on stock price reactions, but only when the weaknesses involve more serious entity-wide controls, as opposed to controls over specific accounts. Practical implicationsThe findings help inform preparers, auditors, regulators and investors about the potentially unintended consequences of reporting format choice. Originality/valueThe findings contribute to the literature on internal control disclosures by demonstrating that market reactions to these disclosures depend not only on the types of material weaknesses disclosed but also on their presentation format.
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Hermanson, Dana R., Jagan Krishnan, and Zhongxia (Shelly) Ye. "Adverse Section 404 Opinions and Shareholder Dissatisfaction toward Auditors." Accounting Horizons 23, no. 4 (2009): 391–409. http://dx.doi.org/10.2308/acch.2009.23.4.391.
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SYNOPSIS: Auditors issuing adverse Section 404 internal control opinions may be viewed as too conservative, or they may be blamed for being partly responsible for the existence of the internal control material weaknesses. Using a sample of 240 companies with adverse internal control opinions and 240 matched “clean” companies in their first year of Section 404 compliance, we examine how shareholder dissatisfaction with the auditors varies depending on material weakness existence/type (company-level versus noncompany-level) and the presence of recent accounting restatements. In the full sample, we find a significant positive interaction between restatement and company-level material weakness—company-level material weaknesses have a greater effect on shareholder dissatisfaction when a restatement has occurred. To provide insight, we partition our sample based on whether test companies have had recent accounting restatements. In the nonrestatement sample, we find that shareholders are less likely to vote for auditor ratification if the company received an adverse Section 404 internal control opinion because of noncompany-level material weaknesses. Shareholders may view the auditor as being too conservative when no company-level material weaknesses are cited and no recent accounting restatements have been issued. In the restatement sample, we find that shareholders are less likely to vote for auditor ratification if the company received an adverse Section 404 opinion with or without company-level material weaknesses cited—but with shareholder dissatisfaction greater for companies with company-level material weaknesses. Hence, in companies with recent accounting restatements, shareholders may blame the auditor for being partly responsible for the existence of material weaknesses (i.e., low audit quality). Overall, the results provide insights into shareholders’ perceptions of auditing and suggest that existing shareholders may sometimes prefer less conservative auditors. We encourage additional research on the role of auditors in protecting current versus prospective shareholders.
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Lobo, Gerald, Chong Wang, Xiaoou Yu, and Yuping Zhao. "Material Weakness in Internal Controls and Stock Price Crash Risk." Journal of Accounting, Auditing & Finance 35, no. 1 (2017): 106–38. http://dx.doi.org/10.1177/0148558x17696761.
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We investigate the association between material weakness in internal controls (MW) disclosed under Section 302 of the Sarbanes–Oxley Act of 2002 (SOX) and future stock price crash risk. We argue that relative to firms with effective internal controls, firms with MW have lower financial reporting precision. The lower reporting precision (a) increases divergence of investor opinion with regard to firm valuation and (b) facilitates managers’ withholding of negative information, which increases the information asymmetry between managers and outside investors. We hypothesize that both these effects increase the probability of a future stock price crash. We find empirical evidence consistent with our prediction. In additional analyses, we document that the positive association between MW and crash risk is primarily driven by company level rather than by account-specific weaknesses, increases with the number of material weaknesses, and intensifies during the financial crisis. In addition, we find that both the existence and the disclosure of MW incrementally affect crash risk, and that MW facilitates managers’ withholding of bad news. Finally, we fail to find consistent evidence of a significant relation between MW disclosed under Section 404 of SOX and crash risk.
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Dhaliwal, Dan, Chris Hogan, Robert Trezevant, and Michael Wilkins. "Internal Control Disclosures, Monitoring, and the Cost of Debt." Accounting Review 86, no. 4 (2011): 1131–56. http://dx.doi.org/10.2308/accr-10043.
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ABSTRACT We test the relationship between the change in a firm's cost of debt and the disclosure of a material weakness in an initial Section 404 report. We find that, on average, a firm's credit spread on its publicly traded debt marginally increases if it discloses a material weakness. We also examine the impact of monitoring by credit rating agencies and/or banks on this result and find that the result is more pronounced for firms that are not monitored. Additional analysis indicates that the effect of bank monitoring appears to be the primary driver of these monitoring results. This finding is consistent with the argument that banks are effective delegated monitors for the debt market. The results of this study suggest the need for future research, particularly to test the differential effects of monitoring on the cost of debt compared to the cost of equity.
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Asare, Stephen K., and Arnold M. Wright. "The Effect of Change in the Reporting Threshold and Type of Control Deficiency on Equity Analysts' Evaluation of the Reliability of Future Financial Statements." AUDITING: A Journal of Practice & Theory 31, no. 2 (2012): 1–17. http://dx.doi.org/10.2308/ajpt-10237.
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SUMMARY We examine the joint effects of reporting threshold (more than remote versus reasonably possible) and type of control deficiency (entity level versus account specific) as described in the adverse report on internal controls on equity analysts' evaluation of the reliability of a company's future financial statements. We hypothesize that equity analysts interpret a “more than remote” threshold to mean a significantly lower likelihood than a “reasonable possibility” threshold. We also hypothesize that when the reporting threshold is more than remote, equity analysts who evaluate an entity level material weakness will indicate a higher likelihood of future material misstatements than those who evaluate an account specific material weakness. However, when the reporting threshold is reasonably possible, equity analysts will assess the same likelihood of future misstatements for both types of material weakness. The results from an experiment that employed 65 equity analysts support our hypotheses. Taken together, the findings suggest that the change to the “reasonably possible” regime has made the account specific material weakness more consequential in evaluating the reliability of the future financial statements but had no effect on the evaluation of entity level material weaknesses.
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Heninger, William G., Eric N. Johnson, and John R. Kuhn. "The Association between IT Material Weaknesses and Earnings Management." Journal of Information Systems 32, no. 3 (2017): 53–64. http://dx.doi.org/10.2308/isys-51884.
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ABSTRACT In this paper, we examine the relationship between (1) information technology-related internal control material weaknesses (ITMWs) as reported by public companies between 2004 and 2012, and (2) earnings management. Prior research suggests that companies with internal control deficiencies are more likely to manage earnings; however, no study has specifically examined the incremental effect of ITMWs on earnings management tendencies. Based on a sample of 268 firm-years of ITMWs disclosed by U.S. public companies in their annual SEC filings (pursuant to Section 404 of the Sarbanes-Oxley Act of 2002), we find a significant positive association between ITMWs and income-increasing abnormal accruals. In addition, we find a positive relation between poor financial condition and material weaknesses in these companies. These results are robust with respect to two control samples of firms with non-IT-related-only material weaknesses (non-ITMWs) and firms with no material weakness disclosures. Implications of these findings for investors, regulators, and future research are discussed.
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Seymore, Megan, and Jesse C. Robertson. "Managers' Intentions to Share Knowledge to Internal Auditors: The Effects of Procedural Fairness and Internal Auditor Type." Journal of Management Accounting Research 32, no. 2 (2019): 225–41. http://dx.doi.org/10.2308/jmar-52563.
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ABSTRACT Knowledge sharing to internal auditors by managers helps internal auditors learn about critical information and improve operational effectiveness, internal controls, and the internal audit function. We examine the interactive effects of procedural fairness at the start of an internal audit, and auditor type (in-house or outsourced) on managers' intentions to share tacit knowledge during an audit, and intentions to share subsequent knowledge of a material control weakness. Our results indicate procedural fairness is an intervention that can increase managers' intentions to share knowledge, yet it depends on internal auditor type and differs by the type of knowledge shared. A high level of procedural fairness increases intentions to share tacit knowledge to outsourced internal auditors only. However, a high level of procedural fairness increases intentions to share subsequent knowledge of a material control weakness to in-house internal auditors only. We offer contributions to the accounting literature and implications for practice. Data Availability: Data available upon request from authors.
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Lee, Se Chul, and Young Woo Ko. "Disappearance of Material Weakness in Internal Control over Financial Reporting and Audit Fees." Korean Accounting Journal 29, no. 6 (2020): 67–94. http://dx.doi.org/10.24056/kaj.2020.10.004.
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De Simone, Lisa, Matthew S. Ege, and Bridget Stomberg. "Internal Control Quality: The Role of Auditor-Provided Tax Services." Accounting Review 90, no. 4 (2014): 1469–96. http://dx.doi.org/10.2308/accr-50975.
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ABSTRACT We propose that auditor-provided tax services (tax NAS) improve internal control quality by accelerating audit firm awareness of transactions material to the financial statements. Using data from 2004 to 2012, we find robust evidence that companies purchasing tax NAS are significantly less likely to disclose a material weakness and that this result is not due to auditor independence impairment. A one-standard-deviation increase in tax NAS is associated with approximately a 13 percent decrease in the rate of material weaknesses relative to the base rate. These results are robust to tests addressing endogeneity concerns. Additional cross-sectional analyses reveal expected increased effects of tax NAS on internal control quality (1) after significant operational changes that require changes to the internal control structure, and (2) earlier in the relationship with the financial statement audit firm, when there are fewer established lines of communication between the audit team and client. This paper contributes to the knowledge spillover literature by identifying a mechanism through which tax NAS improve overall financial reporting quality.
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Bauer, Tim D., Anthony C. Bucaro, and Cassandra Estep. "The Unintended Consequences of Material Weakness Reporting on Auditors' Acceptance of Aggressive Client Reporting." Accounting Review 95, no. 4 (2019): 51–72. http://dx.doi.org/10.2308/accr-52610.
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ABSTRACT Regulators are concerned that auditors do not sufficiently identify and report material weaknesses in internal control over financial reporting (ICFR). However, psychological licensing theory suggests reporting material weaknesses could have unintended consequences for acceptance of aggressive client financial reporting. In an experiment, we predict and find auditors accept more aggressive client reporting after they report a material weakness in ICFR than after they report no material weakness. We provide evidence licensing underlies this effect. In a second experiment, we investigate the efficacy of an intervention to reduce the identified licensing effects by prompting an audit quality goal. We find this prompt mitigates the unintended consequence when auditors report a material weakness. While regulators are concerned companies are undeservedly receiving clean ICFR audit opinions, our findings indicate adverse ICFR opinions may lead auditors to give companies undeservedly clean financial statement opinions. We provide a potential remedy to this unintended consequence.
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Guragai, Binod, and Paul D. Hutchison. "Material weakness disclosures and restatements: value of external auditor attestation." Accounting Research Journal 32, no. 3 (2019): 362–80. http://dx.doi.org/10.1108/arj-08-2017-0130.
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Purpose The purpose of this study is to examine the value of auditor attestation in internal control over financial reporting (ICFR) disclosures. The authors argue that internal control material weakness (ICMW) disclosures issued without auditor attestation by non-accelerated filers provide weaker signal to the impaired financial reporting quality compared to those issued with auditor attestation by accelerated filers. Design/methodology/approach This study investigates the differences in the association between ICMW disclosures and impaired financial reporting quality, as proxied by financial statement restatements, for accelerated and non-accelerated filers. The authors use propensity score matching to find control groups for both accelerated and non-accelerated filers. Findings The authors find that ICMW disclosures signal impaired financial reporting quality for both accelerated and non-accelerated filers, but such signaling is weaker for non-accelerated filers compared to accelerated filers. Research limitations/implications Although propensity score matching was used to match firms with and without ICMW disclosures, any unobservable fundamental differences between these groups may affect the results of this study. Originality/value This study shows that auditors’ involvement in the assessment of internal control effectiveness improves the signaling effect of ICMW disclosures on impaired financial reporting quality. As approved by the House Financial Services (HFS) Committee on November 4, 2009, non-accelerated filers are permanently exempt from auditor attestation requirement. This study provides some evidence that the exemption of non-accelerated filers from auditor attestation may have unintended consequences, and these results should be of interest to regulators and investors.
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Malaescu, Irina, and Steve G. Sutton. "The Reliance of External Auditors on Internal Audit's Use of Continuous Audit." Journal of Information Systems 29, no. 1 (2014): 95–114. http://dx.doi.org/10.2308/isys-50899.
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ABSTRACT As a response to the increased demand for timely and ongoing assurance over the effectiveness of risk management and control systems, companies are moving toward a more automated control environment through the implementation of continuous audit modules. The purpose of this study is to evaluate external auditors' reliance on internal audit's work when advanced audit techniques are introduced by the internal auditor and the impact this reliance has on budgeted audit hours. Prior literature suggests that internal control deficiencies also have an impact on external auditor reliance and the audit budget. The reliance decision of an external auditor has important economic consequences and implications for efficiency and effectiveness of the overall audit. In recent years, the PCAOB has encouraged greater such reliance to improve audit efficiency. An experiment is conducted with 87 experienced external auditors to investigate the theorized effects. Using a 2 × 2 between-subjects factorial design, the frequency of the internal audit (traditional versus continuous audit) and prior year material weakness (absent versus present) are manipulated. Consistent with predictions, we find that auditors are willing to rely more on internal audit work in a continuous audit environment than in a traditional environment, and this effect is magnified when the prior year audit report on the effectiveness of internal controls indicates that controls are working properly. The presence of a material weakness, however, negatively impacts judgments on the budget for the valuation of a complex account. In addition, both material weakness and continuous audit have an impact on the overall audit budget, which is reduced only when the company has no prior year material weakness and a functioning continuous audit module is put in place. The results show that auditors increase budgeted hours for the engagement at a higher rate when the client uses traditional internal audit procedures.
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Beneish, Messod Daniel, Mary Brooke Billings, and Leslie D. Hodder. "Internal Control Weaknesses and Information Uncertainty." Accounting Review 83, no. 3 (2008): 665–703. http://dx.doi.org/10.2308/accr.2008.83.3.665.
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We analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures required by Section 404 of the Sarbanes-Oxley Act. We find that Section 302 disclosures are associated with negative announcement abnormal returns of −1.8 percent, and that firms experience an abnormal increase in equity cost of capital of 68 basis points. We conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting. In contrast, we find that Section 404 disclosures have no noticeable impact on stock prices or firms' cost of capital. Further, we find that auditor quality attenuates the negative response to Section 302 disclosures and that accelerated filers—larger firms required to file under Section 404—have significantly less negative returns (−1.10 percent) than non-accelerated filers (−4.22 percent). The findings have implications for the debate about whether to implement a scaled securities regulation system for smaller public companies: material weakness disclosures are more informative for smaller firms that likely have higher pre-disclosure information uncertainty.
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Hoitash, Rani, Udi Hoitash, and Karla M. Johnstone. "Internal Control Material Weaknesses and CFO Compensation*." Contemporary Accounting Research 29, no. 3 (2011): 768–803. http://dx.doi.org/10.1111/j.1911-3846.2011.01122.x.
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Ettredge, Michael L., Chan Li, and Lili Sun. "The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era." AUDITING: A Journal of Practice & Theory 25, no. 2 (2006): 1–23. http://dx.doi.org/10.2308/aud.2006.25.2.1.
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This study analyzes the impact of internal control quality on audit delay following the implementation of the Sarbanes-Oxley Act (2002) (SOX). Unlike prior studies of audit delay that obtain information about internal control strength via surveys, or use fairly crude proxies for internal control quality, our study employs external auditor assessments of internal control over financial reporting (ICOFR) that are publicly disclosed in SEC 10-K filings under SOX Section 404. Thus, the empirical evidence provided in this study is both timely and reliable (i.e., not subject to small sample bias or weak proxies). Consistent with our expectation, we find that the presence of material weakness in ICOFR is associated with longer delays. The types of material weakness also matter. Compared to specific material weakness, general material weakness is associated with longer delays. Additional analyses indicate that companies with control problems in personnel, process and procedure, segregation of duties, and closing process experience longer delays. After controlling for other impact factors, this study also documents a significant increase in audit delay associated with the fulfillment of the SOX Section 404 ICOFR assessment requirement. This suggests that Section 404 assessments have made it more difficult for firms to comply with the SEC's desire to shorten 10-K filing deadlines. Our finding thus supports and helps explain the SEC's decisions in 2004 and 2005 to defer scheduled reductions in 10-K filing deadlines (from 75 days to 60 days) for large, accelerated filers.
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Ji, Amy E. "Internal Control Weakness and Managerial Myopia: Evidence from SOX Section 404 Disclosures." ACRN Journal of Finance and Risk Perspectives 8, no. 1 (2019): 71–83. http://dx.doi.org/10.35944/jofrp.2019.8.1.004.
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Problem/ Relevance: Managerial myopia is an important issue of interests to academics, practitioners, and regulators as managers have been condemned for their obsession with short-term earnings and myopic investment decisions that sacrifice firms’ long term value for shareholders. This article contributes by examining whether the quality of firms’ internal controls over financial reporting (ICFR) is associated with managerial myopia. Research Objective/ Questions: The purpose of this study is to examine whether managers in firms reporting material internal control weaknesses (ICW) under Section 404 of the Sarbanes-Oxley Act (SOX) of 2002 engage in myopic behaviors more than those in firms without reporting ICW. Methodology: The study uses the logit regression model to investigate a sample obtained from Compustat for the period of 2005-2013. Major Findings: The study finds a positive association between internal control weaknesses reported by auditors under Section 404 of the SOX and managerial short-termism which is measured by the probability of cutting R&D expenses in the current year from the previous year. Implications: Whereas prior studies mostly examine the impact of internal controls on accounting quality, this study demonstrates the implication of internal controls beyond financial reporting quality by showing an association between internal control quality and managerial myopia. Future research may further investigate the association between firms’ financial reporting quality and managerial investment decisions.
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Akresh, Abraham D. "A Risk Model to Opine on Internal Control." Accounting Horizons 24, no. 1 (2010): 65–78. http://dx.doi.org/10.2308/acch.2010.24.1.65.
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SYNOPSIS: In recent years, auditors have reported on the effectiveness of internal control, usually as part of integrated audits. The audit risk model currently in auditing standards was designed for financial statement audits, not internal control audits—a key part of integrated audits. Because the audit of processes (internal control) is conceptually different from the audit of outputs (financial statements), the auditor needs a different risk model to provide a conceptual framework for internal control audits. The model I propose1 provides the auditor a method to determine the appropriate nature, timing, and extent of testing in an integrated audit. My model is focused on the risk of material weakness, rather than the risk of material misstatement. I also show how the auditor would use two different models in an integrated audit.
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Munsif, Vishal, K. Raghunandan, and Dasaratha V. Rama. "Internal Control Reporting and Audit Report Lags: Further Evidence." AUDITING: A Journal of Practice & Theory 31, no. 3 (2012): 203–18. http://dx.doi.org/10.2308/ajpt-50190.
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SUMMARY Internal control reporting continues to be of significant interest to regulators and legislators, as evidenced by the internal control-related requirements of the Dodd-Frank Act (2010) and the JOBS Act (2012) to exempt smaller firms from the requirements of Section 404. We extend prior research on the association between internal control weaknesses and audit report lag by (1) using data from 2008 and 2009, (2) comparing accelerated and non-accelerated filers, and (3) examining the impact of remediation of previously disclosed internal control problems. We find that (1) in 2008, the increase in audit report lag in the presence of material weaknesses in internal control is lower for non-accelerated filers as compared to accelerated filers, and (2) while the effect of a material internal control weakness on audit report lag is significantly lower in 2009 than in 2008 for accelerated filers, there is no such change for non-accelerated filers. We also find that for firms remediating previously disclosed internal control problems, there is a significant decline in audit report lag; yet, the remediating firms continue to have higher reporting lags than firms that had clean Section 404 opinions in both years. We also find that, at least with respect to the effect of internal control problems on audit report lag, the “small accelerated filers” (defined as those with market capitalization less than $250 million) are treated by the auditors as being (1) substantively similar to other accelerated filers, and (2) quite distinct from non-accelerated filers.
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Holt, Travis P. "An Examination of Nonprofessional Investor Perceptions of Internal and External Auditor Assurance." Behavioral Research in Accounting 31, no. 1 (2018): 65–80. http://dx.doi.org/10.2308/bria-52276.
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ABSTRACT This study investigates whether assured disclosures of management's remediation of material weaknesses in internal controls affect positively unsophisticated investor perceptions of disclosure credibility and the likelihood of their investing in a firm. The results indicate that investors perceive assured material weakness remediation disclosures, whether the audit source is external or internal to the firm, to be more credible than unassured disclosures. Specifically, external assurance is seen to be more credible than the assurance provided by internal auditors but that is seen as more credible than no assurance. However, investment likelihood remains the same regardless of assurance source. Furthermore, the results indicate that investor disclosure credibility perceptions and investing likelihood are lower for internally assured pervasive material weakness remediation disclosures than internally assured account-specific remediations and all externally assured remediation disclosures. Finally, mediation results suggest that both internal and external auditor assurance increases investing likelihood indirectly through increased disclosure credibility.
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Cohen, Jeffrey R., Jennifer R. Joe, Jay C. Thibodeau, and Gregory M. Trompeter. "Audit Partners' Judgments and Challenges in the Audits of Internal Control over Financial Reporting." AUDITING: A Journal of Practice & Theory 39, no. 4 (2020): 57–85. http://dx.doi.org/10.2308/ajpt-18-088.
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SUMMARY Internal control over financial reporting (ICFR) audits have been the subject of intensive examination by the Public Company Accounting Oversight Board (PCAOB) and researchers but the process through which auditors make ICFR judgments is largely a “black box.” To understand ICFR judgments, we conducted semi-structured interviews with 20 audit partners. Common themes in our interviews suggest that the subjectivity inherent in the ICFR evaluation task contributes to resistance against ICFR audit findings and cougnterarguments from management. Moreover, auditors perceive that their judgments are being second-guessed by PCAOB inspectors. Auditors believe that managers have difficulty accepting that material weaknesses can exist without a detected error, that management's reflexive reaction is to deny/avoid a material weakness finding, and managers routinely claim that management review controls (MRCs) would have caught the detected control deficiency. Auditors cope with management's defenses by consulting with their national office and leveraging support from strong audit committees. Data Availability: Requests for the data should be accompanied by a description of intended uses.
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Keune, Marsha B., and Timothy M. Keune. "Do Managers Make Voluntary Accounting Changes in Response to a Material Weakness in Internal Control?" AUDITING: A Journal of Practice & Theory 37, no. 2 (2018): 107–37. http://dx.doi.org/10.2308/ajpt-51782.
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SUMMARY This study examines whether managers make voluntary changes in accounting principle in response to a material weakness (MW). We find that managers are more likely to report voluntary changes in the same year as and year following a MW disclosure, a result largely driven by companies with a greater number of MWs. Although MW companies with new CFOs are more likely to make voluntary changes in the same year, restatements and new auditors, CFOs, CEOs, and directors are not the primary drivers of these results. Managers of MW companies justify voluntary changes as improving accounting information, conforming internal policies, and providing administrative benefits. MW companies that report voluntary changes in the same year and justify the changes as improving accounting are more likely to remediate at least one MW in the following year. Further, entity-level MW companies with voluntary changes in the same year are associated with higher accruals quality than other entity-level MW companies, and a similar result holds for companies with more MWs. These results suggest that MW companies likely report voluntary changes as part of a strategy to improve financial reporting processes and policies. Our study informs both internal control policymakers and accounting standards setters. Data Availability: All data are publicly available from sources identified in the study.
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Lee, Se-Chul, and Young-Woo Ko. "The Change of Accruals Quality after Disclosure of Material Weakness in Internal Accounting Control System." Accounting Information Review 37, no. 2 (2019): 93–113. http://dx.doi.org/10.29189/kaiaair.37.2.5.
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Lin, Yi-Hung, Meghann A. Cefaratti, Chih-Chen Lee, and Hua-Wei Huang. "Internal Control Material Weaknesses and Foreign Corrupt Practices Act Violations." Journal of Forensic Accounting Research 3, no. 1 (2018): A80—A104. http://dx.doi.org/10.2308/jfar-52296.
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ABSTRACT The purpose of this research is to investigate the relationship between internal control material weaknesses (ICMWs), as measured by presence, number, and type, and Foreign Corrupt Practices Act (FCPA) violations. Our results indicate that firms with ICMWs are more likely to violate the FCPA and firms with multiple ICMWs have a higher likelihood of violating the FCPA than firms with fewer ICMWs. Further, firms with ICMWs related to the risk assessment, control environment, and control activities components of internal controls (based on the COSO Internal Control—Integrated Framework) present a higher risk of FCPA violations than firms without ICMWs in those areas. These findings substantiate the importance of effective internal controls in supporting firms' regulatory compliance. JEL Classifications: M42; M48; D73.
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Lin, Shu, Mina Pizzini, Mark Vargus, and Indranil R. Bardhan. "The Role of the Internal Audit Function in the Disclosure of Material Weaknesses." Accounting Review 86, no. 1 (2011): 287–323. http://dx.doi.org/10.2308/accr.00000016.
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ABSTRACT: This study investigates the role that a firm’s internal audit function (IAF) plays in the disclosure of material weaknesses reported under Section 404 of the Sarbanes-Oxley Act of 2002 (U.S. Congress 2002). Using data from 214 firms, we examine the relation between material weakness (MW) disclosures and various IAF attributes and activities. Our results indicate that MW disclosures are negatively associated with the education level of the IAF 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. The timing of Section 404 work and the nature of follow-up monitoring suggests that these aspects of IAF quality help prevent MWs from occurring. We find that MW disclosures are positively associated with the IAF practice of grading audit engagements and external-internal auditor coordination, suggesting that these activities increase the effectiveness of Section 404 compliance processes.
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Ittonen, Kim. "Investor reactions to disclosures of material internal control weaknesses." Managerial Auditing Journal 25, no. 3 (2010): 259–68. http://dx.doi.org/10.1108/02686901011026350.
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Lee, Jong Eun. "Managerial Ability And The Effectiveness Of Internal Control Over Financial Reporting." Journal of Applied Business Research (JABR) 31, no. 5 (2015): 1781. http://dx.doi.org/10.19030/jabr.v31i5.9391.
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<p>Able managers are considered more likely to produce high quality earnings, as suggested by earlier studies in related fields. Considering a positive association between earnings quality and effectiveness of internal control over financial reporting, I investigate the association between the latter, and managerial ability. As a result, I find that managerial ability is negatively associated with the existence of material weakness(es) in internal control over financial reporting. This result suggests that able managers are more likely to establish and maintain effective internal control over financial reporting, which helps them better monitor their firms' financial reporting.</p>
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Donelson, Dain C., Matthew S. Ege, and John M. McInnis. "Internal Control Weaknesses and Financial Reporting Fraud." AUDITING: A Journal of Practice & Theory 36, no. 3 (2016): 45–69. http://dx.doi.org/10.2308/ajpt-51608.
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SUMMARY This study examines whether and how weak internal controls increase the risk of financial reporting fraud by top managers. There is a longstanding debate on whether control strength significantly affects fraud risk, yet little evidence on this issue. Further, there is no evidence on the mechanism linking control strength to fraud risk. We find a strong association between material weaknesses and future fraud revelation. We theorize that this link could be attributable to weak controls (1) giving managers greater opportunity to commit fraud, or (2) signaling a management characteristic that does not emphasize reporting quality and integrity. We find support for the opportunity explanation, but not through specific accounts linked to control weaknesses. Instead, consistent with the PCAOB's assertion, weaknesses in entity-wide controls, not process-level controls, are associated with a higher risk of reporting fraud. JEL Classifications: M41.
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Tang, Dragon Yongjun, Feng Tian, and Hong Yan. "Internal Control Quality and Credit Default Swap Spreads." Accounting Horizons 29, no. 3 (2015): 603–29. http://dx.doi.org/10.2308/acch-51100.
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SYNOPSIS This paper presents the first study on the effects of internal control quality on derivatives pricing. Specifically, we utilize data from the credit default swap (CDS) transactions of well-monitored companies to examine the relationship between the quality of internal control and the cost of debt. CDS data are advantageous for the study of this relationship because CDS contracts are comparatively more homogeneous, standardized, and liquid than either bank loans or public bonds. We find that, all else being equal, companies experiencing internal control material weakness (MW) exhibit higher CDS spreads than companies with effective internal control. Moreover, the MW effect on CDS spreads is more pronounced for company-level MWs than for less severe, account-specific MWs. We also document that CDS spreads increase around the filings of MWs. Furthermore, the deterioration of internal control quality is related to increases in CDS spreads. Finally, short-maturity CDS spreads are more affected by MWs than are long-maturity CDS spreads. JEL Classifications: M41; G32; K22. Data Availability: The data are available from public sources.
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Munsif, Vishal, K. Raghunandan, Dasaratha V. Rama, and Meghna Singhvi. "Audit Fees after Remediation of Internal Control Weaknesses." Accounting Horizons 25, no. 1 (2011): 87–105. http://dx.doi.org/10.2308/acch.2011.25.1.87.
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SYNOPSIS: In this study, we examine audit fees for SEC registrants that remediate previously disclosed material weaknesses in internal control. We find that remediating firms have lower audit fees when compared to firms that continue to report material weaknesses in internal control. However, the remediating firms continue to pay, in the year of remediation as well as one and two years subsequent to remediation, a significant audit fee premium compared to firms that have clean Section 404 reports in each of the first four years. Firms that had an adverse Section 404 report only in the first year, but remediated the problems in year two and had clean Section 404 reports in years three and four, pay an audit fee premium of 32 (21) percent in the third (fourth) year when compared to firms that had clean Section 404 reports in each of the first four years. The results, thus, suggest that audit fees are “sticky” for firms that have material weaknesses in internal controls over financial reporting, and suggest some interesting questions for future research.
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Kanagaretnam, Kiridaran, Gerald J. Lobo, Chen Ma, and Jian Zhou. "National Culture and Internal Control Material Weaknesses Around the World." Journal of Accounting, Auditing & Finance 31, no. 1 (2014): 28–50. http://dx.doi.org/10.1177/0148558x14560897.
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Parker, Robert James, Mai Dao, Hua-Wei Huang, and Yun-Chia Yan. "Disclosing material weakness in internal controls: Does the gender of audit committee members matter?" Asia-Pacific Journal of Accounting & Economics 24, no. 3-4 (2015): 407–20. http://dx.doi.org/10.1080/16081625.2015.1057190.
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Myllymäki, Emma-Riikka. "The Persistence in the Association between Section 404 Material Weaknesses and Financial Reporting Quality." AUDITING: A Journal of Practice & Theory 33, no. 1 (2013): 93–116. http://dx.doi.org/10.2308/ajpt-50570.
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SUMMARY This study examines whether Sarbanes-Oxley (SOX) Section 404 material weakness (MW404) disclosures are predictive of future financial reporting quality. I find evidence that for companies with a history of MW404s, the likelihood of misstatements in financial information continues to be significantly higher for two years after the last MW404 report compared to companies without a history of reported MW404s. The magnitude of the effect decreases non-linearly with decreasing speed. The findings further imply that the reason for the misstatement incidences is the unacknowledged pervasiveness of control problems. In particular, it appears that in many cases, the future misstatements are unrelated to the MW types disclosed in the last MW404 report, suggesting that some MW types are unacknowledged and, hence, control problems are even more pervasive than what was identified. Overall, the findings of this study highlight the importance of discovering and disclosing material weaknesses in internal control over financial reporting.
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Bentley-Goode, Kathleen A., Nathan J. Newton, and Anne M. Thompson. "Business Strategy, Internal Control over Financial Reporting, and Audit Reporting Quality." AUDITING: A Journal of Practice & Theory 36, no. 4 (2017): 49–69. http://dx.doi.org/10.2308/ajpt-51693.
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SUMMARY This study examines whether a company's business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and auditors' internal control reporting quality. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors' internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies' internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients. JEL Classifications: D21; 21; M41. Data Availability: Data are obtained from public sources as indicated in the text.
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Chan, Kam C., Barbara Farrell, and Picheng Lee. "Earnings Management of Firms Reporting Material Internal Control Weaknesses under Section 404 of the Sarbanes-Oxley Act." AUDITING: A Journal of Practice & Theory 27, no. 2 (2008): 161–79. http://dx.doi.org/10.2308/aud.2008.27.2.161.
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SUMMARY: The main objectives of the Sarbanes-Oxley Act of 2002 are to improve the accuracy and reliability of corporate disclosure. Under Section 404 of the Sarbanes-Oxley Act, the external auditor has to report an assessment of the firm’s internal controls and attest to management’s assessment of the firm’s internal controls. Material weaknesses in internal controls must be disclosed in the auditor and management reports. The objective of this study is to examine if firms reporting material internal control weaknesses under Section 404 have more earnings management compared to other firms. The results provide mild evidence that there are more positive and absolute discretionary accruals for firms reporting material internal control weaknesses than for other firms. Since the findings of ineffective internal controls by auditors under Section 404 may cause firms to improve their internal controls, Section 404 has the potential benefits of reducing the opportunity of intentional and unintentional accounting errors and of improving the quality of reported earnings.
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Liu, Wu-Po, and Hua-Wei Huang. "Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms." International Business Review 29, no. 5 (2020): 101712. http://dx.doi.org/10.1016/j.ibusrev.2020.101712.
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Gleason, Cristi A., Morton Pincus, and Sonja Olhoft Rego. "Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management." Journal of the American Taxation Association 39, no. 1 (2017): 25–44. http://dx.doi.org/10.2308/atax-51511.
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ABSTRACT We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.
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Ghani, Erlane K., Mazni Zulkifli, and Rahayu Abdul Rahman. "Factors Influencing Material Weaknesses in Internal Control Over Financial Reporting in Malaysian Property Companies." Journal of Social Sciences Research, no. 52 (January 30, 2019): 559–68. http://dx.doi.org/10.32861/jssr.52.559.568.
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This study examines the factors influencing material weaknesses in internal control over financial reporting among the companies in the property industry in Malaysia. Specifically, this study examines six factors namely firm age, firm size, financial health, financial reporting complexity, rapid growth and corporate governance. Using content analysis on the annual reports of 80 property companies, this study shows that only firm size has a significant influence on the material weaknesses in internal control over financial reporting. Other factors however, show no significant influence on the material weaknesses in internal control over financial reporting. The result in this study indicates that small companies tend to have material weaknesses in internal control due to them having limited resources in building effective internal control. These companies generally could not afford to spend on expertise such as internal auditor or consultant to assist in improving and strengthening internal control. The findings of this study shed some lights to the regulators and practitioners on the factors influencing material weaknesses in the internal control over financial reporting. Of consequence, this would reduce information asymmetry between the insiders and outsiders of a company and thus, increasing the quality of financial reporting.