Business Commons^™

Material Internal Control Weaknesses And Earnings Management In The Post-Sox Environment, Benjamin P. Foster, Trimbak Shastri

Faculty Scholarship

Prior studies found that companies with internal control deficiencies incorporate abnormal accounting accruals into their financial statements. However, these studies did not consider the materiality of abnormal accruals. Abnormal accruals should be within materiality when financial statements receive clean audit opinions. When material internal control weaknesses (MICW) exist, to compensate for additional risk, auditors should apply more audit effort to gain the quantity and quality of evidence necessary to obtain a reasonable degree of assurance to support their audit reports. We find evidence of this because audit fees are significantly higher for MICW companies than those for effective internal controls …