Abstract : One objective of the internal control reporting requirements of the Sarbanes-Oxley Act of 2002 (SOX) is to improve the quality of financial reporting. This study examines whether a relation exists between internal control quality and accounting conservatism, which is an important feature of high financial reporting quality. Using a sample of firms which disclose material weaknesses (MWs) in internal control under SOX, we find that firms with MWs exhibit less accounting conservatism than firms with no such weaknesses. However, firms that disclose MWs andwhose auditors subsequently confirm the remediation of these weaknesses exhibit more conservative accounting earnings than firms that 学习林俊德心得体会continue to have MWs. We also find that the internal control reporting requirements have a disciplining effect on firms’ financial reporting. Specifically, firms with MWs exhibit more conservative earnings after the disclosure of such weaknesses, regardless of whether or not these weaknesses are remediated. Overall, our results show that the quality of internal control affects accounting conservatism and underscore the importance of the internal control reporting requirements in enhancing the quality of financial reporting.
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1. Introduction
“This law (Sarbanes-Oxley Act) says to shareholders that the financial information you receive from a company will be true and reliable.This law says to workers: we will not tolerate reckless practices that artificially drive up stock prices and eventually destroy the companies, and the pensions, and your jobs.”1
In 2002, following a series of high-profile cases of corporate improprieties, the U.S. Congress passed the Sarbanes-Oxley Act (SOX), which is widely considered to contain the most important and sweeping corporate reforms since the 1930s. As can be seen from the above excerpt from President Bush’s speech, made during his signing of the Act, one of the objectives of regulators in passing SOX is to ensure the reliability of financial reporting and to prevent companies from artificially driving up stock prices to mislead investors. 2 In this study, we examine whether the internal hindi sms control reporting requirements of SOX help to enhance the quality of financial reporting by ensuring conservative accounting practices.3,2552
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