The Impact of Outcome Effect and Client Transparency on Auditors' Evaluation of Internal Control Deficiencies.

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Abstract

Auditor’s evaluation of internal control deficiencies has received attention from regulators and academics alike. PCAOB inspectors and SEC staff have both identified auditors issuing an internal control material weakness without materially misstated financial statements to be a source of contention. This study seeks to examine the dollar impact that results to the financial statements as a result of an identified internal control deficiency, and how these evaluations are impacted by client transparency. The results of this study suggest that concerns about auditors not issuing a material weakness in internal controls when financial statements are not materially misstated are warranted. Furthermore, while client transparency interacts with the dollar amount of a misstatement for auditor’s evaluation of the deficiency meeting the definition of a material weakness, this does not result in an interaction for auditors actually assessing a material weakness. Thus while client transparency increases the difference in auditors evaluation if a control deficiency meets the definition of a material weakness, it does not cause auditors to take follow up action. The results of this study present the first step for firms to develop effective trainings in order to train their staff on how to effectively assess control deficiencies.

Authors

• Jared Koreff, University of Central Florida

• Gregory M Trompeter, University of Central Florida