The Lingering Effects of Internal Control Weakness: Is Remediation Enough?

• In Event: Auditing 1

Abstract

Through this study, we examine whether firms that have reported material weaknesses in the past experience a lingering risk premium from investors in a post remediation period that is similar to the risk premium they experience from auditors in a post remediation period. Our results indicate that firms experience a lingering risk premium from investors in the form of higher betas and idiosyncratic risk. However, the risk premium assessed by the auditors (i.e., higher audit fees) can be mitigated through improved reporting quality and meaningful governance changes. Additionally, the lingering risk premium assessed by investors can be mitigated through superior performance.

Authors

• Robert Felix, University of Baltimore

• Amanda Lyn Wilford, Southern Utah University