IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v61y2019icp228-240.html
   My bibliography  Save this article

Dynamics of deterioration in internal control reported under SOX 404

Author

Listed:
  • Chen, Chunhua
  • Li, Tianze
  • Shao, Ruiqing
  • Zheng, Steven Xiaofan

Abstract

We examine why many firms disclose internal control weaknesses (ICW) under section 404 of Sarbanes-Oxley Act after previously reporting effective internal control (IC). We find that about half of the cross-sectional ICW determinant variables either do not change significantly from Year T-1 to Year T or change in a direction that is not expected to cause IC deterioration. The reported deterioration in IC can be attributed to increases in audit fee, management turnover, restatement, financial distress, firm size, and decrease in financial activities. Consistent with an agency hypothesis that managers try to manipulate the IC process when firm performance declines, the reported deterioration in IC is also associated with poor stock returns in the year before disclosure. ICW disclosure is more likely when poor stock return is combined with higher sensitivity of executive compensation to stock price change.

Suggested Citation

  • Chen, Chunhua & Li, Tianze & Shao, Ruiqing & Zheng, Steven Xiaofan, 2019. "Dynamics of deterioration in internal control reported under SOX 404," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 228-240.
    • Handle: RePEc:eee:reveco:v:61:y:2019:i:c:p:228-240
    DOI: 10.1016/j.iref.2019.02.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056018308098
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2019.02.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adrian-Cosmin Caraiman, 2020. "Responsibility for Internal Control in Corporate Governance," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 612-618, December.
    2. Omar, Ayishat & Tang, Alex P., 2019. "Earnings management and convertible preferred stock calls," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 423-433.
    3. Oliver Henk, 2020. "Internal control through the lens of institutional work: a systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 239-273, September.

    More about this item

    Keywords

    Sarbanes-oxley act; Internal control weakness; Deterioration; Restatement; Agency problem; Benchmark adjusted returns; Executive compensation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:61:y:2019:i:c:p:228-240. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.