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Internal Control Weakness and Information Quality

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  • Tzu-Ching Weng
  • Hsin-Yi Chi
  • Guang-Zheng Chen

Abstract

This paper explores the effect of internal control weaknesses (hereafter ICW) and their remediation on information precision for firms who filed Section 404 reports with the SEC. First, we find that the presence of ICW is associated with lower precision of both public and private information. Second, we find that the effect of ICW on public information precision is stronger for firms with firm-level ICW than for those with account-specific ICW. However, we find no such a relation for private information precision. Third, we find that the precision of both private and public information are higher for firms remedying previous weaknesses relative to firms who do not remedy their weaknesses. Further analyses indicate that overall information uncertainty is higher for ICW firms than non-ICW firms. However, we find no difference in consensus among investors between ICW and non-ICW firms. The results suggest that lower precision of public information is offset by lower precision of private information such that consensus among investors is not affected. Finally, we find that firms with different internal control opinions in successive years exhibit changes in precision of public and private information, consistent with our prediction.

Suggested Citation

  • Tzu-Ching Weng & Hsin-Yi Chi & Guang-Zheng Chen, 2015. "Internal Control Weakness and Information Quality," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 5(5), pages 1-9.
  • Handle: RePEc:spt:apfiba:v:5:y:2015:i:5:f:5_5_9
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    Cited by:

    1. Fu-Hsiang Chen & Ming-Fu Hsu & Kuang-Hua Hu, 2022. "Enterprise’s internal control for knowledge discovery in a big data environment by an integrated hybrid model," Information Technology and Management, Springer, vol. 23(3), pages 213-231, September.
    2. Sezen Uludag, 2016. "The importance of control environment in an organization for an independent auditor to determine nature,timing, and extent of substantive tests: An application in Turkey," Journal of Administrative and Business Studies, Professor Dr. Usman Raja, vol. 2(6), pages 294-303.
    3. Liedtke, Stephan, 2017. "Chinese energy investments in Europe: An analysis of policy drivers and approaches," Energy Policy, Elsevier, vol. 101(C), pages 659-669.

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