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Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms

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  • Liu, Wu-Po
  • Huang, Hua-Wei

Abstract

This study examines whether auditor realignments and voluntary Sarbanes-Oxley (SOX) Section 404 adoption are associated with the remediation of internal control material weaknesses (ICMWs) in the case of U.S.-listed foreign companies. Furthermore, we investigate whether the results are driven by the home country’s legal systems. Using a sample of 266 U.S.-listed foreign firm-year observations reporting ICMWs, we found that firms engaging new auditors are more likely to remediate their ICMWs effectively in the subsequent year. Furthermore, we found that firms in the voluntary adoption period are less likely to solve internal control problems and that ICMW remediation significantly improved earnings quality. However, our results hold only for firms from common-law countries. This study provides evidence to academics that auditor realignment can serve as a functional change by which U.S.-listed foreign companies can remediate their ICMWs. Furthermore, this paper extends earlier cross-country research and suggests that country institutional differences affect the internal control reporting behavior of auditors and the effect of ICMW remediation on earnings quality.

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  • Liu, Wu-Po & Huang, Hua-Wei, 2020. "Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms," International Business Review, Elsevier, vol. 29(5).
    • Handle: RePEc:eee:iburev:v:29:y:2020:i:5:s0969593120300500
    DOI: 10.1016/j.ibusrev.2020.101712
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    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. Areneke, Geofry & Adegbite, Emmanuel & Tunyi, Abongeh, 2022. "Transfer of corporate governance practices into weak emerging market environments by foreign institutional investors," International Business Review, Elsevier, vol. 31(5).
    3. Mounia Boulhaga & Abdelfettah Bouri & Hany Elbardan, 2022. "The effect of internal control quality on real and accrual-based earnings management: evidence from France," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 33(4), pages 545-567, December.

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