The Value of a Material Weakness Remediation Audit in the Context of Auditing Standard No. 4

• In Event: Disclosures in Decision Making

Abstract

We examine the value of a voluntary audit of a firm’s material weakness (MW) remediation disclosure, as evidenced by nonprofessional investors’ willingness to invest in the firm. In a between-participants experiment, we manipulate the presence of an audit of management’s MW remediation disclosure and the pervasiveness of the previously existing MW. Furthermore, we examine whether a voluntary audit increases the credibility of the MW remediation disclosure (Mercer 2004). We find that management’s choice to obtain an independent audit on their MW remediation disclosure increases disclosure credibility which in turn increases investors’ willingness to invest in the firm, regardless of the pervasiveness of the remediated MW.

Authors

• Sanaz Aghazadeh, Lehigh University

• Marietta Peytcheva, Lehigh University