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Internal control deficiencies and the issuance of going concern opinions

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  • Jiang, Wei
  • Rupley, Kathleen Hertz
  • Wu, Jia

Abstract

This study examines whether internal control quality is associated with auditors’ going concern assessments following the implementation of the Sarbanes–Oxley Act of 2002 (SOX). Based on a sample of financially distressed firms that issued internal control reports under SOX Section 404 in 2004 and 2005, we find that firms with material internal control weaknesses are more likely to receive going concern audit opinions. Further analysis indicates that the positive association between disclosures of material weaknesses and auditors’ propensity to issue a going concern opinions is largely driven by a subset of firms that disclose company-level material weaknesses, suggesting that only the more severe type of internal control material weakness influences the going concern assessment. These findings add to our understanding of the audit opinion formation process and the potentially important impact of internal control quality on that process.

Suggested Citation

  • Jiang, Wei & Rupley, Kathleen Hertz & Wu, Jia, 2010. "Internal control deficiencies and the issuance of going concern opinions," Research in Accounting Regulation, Elsevier, vol. 22(1), pages 40-46.
    • Handle: RePEc:eee:reacre:v:22:y:2010:i:1:p:40-46
    DOI: 10.1016/j.racreg.2009.11.002
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    1. Hollis Ashbaugh‐Skaife & Daniel W. Collins & William R. Kinney Jr & Ryan Lafond, 2009. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 1-43, March.
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    Cited by:

    1. Georgia Boskou & Efstathios Kirkos & Charalambos Spathis, 2018. "Assessing Internal Audit with Text Mining," Journal of Information & Knowledge Management (JIKM), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-22, June.
    2. Jiang, Haiyan & Chen, Jun, 2019. "Short selling and financial reporting quality: Evidence from Chinese AH shares," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 118-130.
    3. Beck, Amanda W. & Stone, Mary S., 2017. "Why municipalities fail: Implications for uncertainty disclosures," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 1-9.
    4. Brown, Kareen E. & Elayan, Fayez A. & Li, Jingyu & Mohammad, Emad & Pacharn, Parunchana & Liu, Zhefeng Frank, 2016. "To exempt or not to exempt non-accelerated filers from compliance with the auditor attestation requirement of Section 404(b) of the Sarbanes–Oxley Act," Research in Accounting Regulation, Elsevier, vol. 28(2), pages 86-95.
    5. Rauf Ibrahim & Du Jianguo & Santosh Rupa Jaladi & Peter Lartey Yao & Amponsah Clinton Kwabena, 2019. "Determinants of Board Contribution to Internal Controls and Good Governance: Evidence of Rural Banks in Ghana," Journal of Public Administration and Governance, Macrothink Institute, vol. 9(4), pages 85-100, December.
    6. Mohamed A. Wahdan, 2018. "Impact of a Practical Flowcharts Approach on Educating the Control Risk Assessment," Accounting and Finance Research, Sciedu Press, vol. 7(2), pages 1-1, May.
    7. Kuang, Yu Flora & Lee, Gladys, 2017. "Corporate fraud and external social connectedness of independent directors," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 401-427.
    8. Su, Lixin (Nancy) & Zhao, Xuezhou (Rachel) & Zhou, Gaoguang (Stephen), 2014. "Do customers respond to the disclosure of internal control weakness?," Journal of Business Research, Elsevier, vol. 67(7), pages 1508-1518.
    9. Dowdell, Thomas D. & Kim, Jang-Chul & Klamm, Bonnie K. & Watson, Marcia Weidenmier, 2013. "Internal control reporting and market liquidity," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 30-40.
    10. Fogel, Kathy & El-Khatib, Rwan & Feng, Nancy Chun & Torres-Spelliscy, Ciara, 2015. "Compliance costs and disclosure requirement mandates: Some evidence," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 83-87.
    11. Yu‐Feng Hsu & Wei‐Po Lee, 2020. "Evaluation of the going‐concern status for companies: An ensemble framework‐based model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(4), pages 687-706, July.

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