Does it Pay to Remediate? An Analysis of the Internal and External Benefits that Result from Remediation

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 6: Demand for Audits / Audit Quality

Abstract

Through this study, we utilize a modified difference-in-difference model design to examine how firms are impacted after they remediate previously reported material weaknesses. More specifically, we examine how remediating firms receive benefits (i.e., through improvements in performance and information quality) and/or experience reductions in the external costs that are applied to firms that report material weaknesses (i.e., audit fees and investor risk premiums). Our results indicate that the benefits associated with material weakness remediation firms are exhibited through improvements in both performance and information quality. Additionally, and as an important extension to prior research, our results indicate that an added benefit of remediation is that the external costs associated with reporting material weaknesses (i.e., audit fees and investor risk premiums) are reduced significantly compared to non-remediating firms and remediating firms in their pre-remediation period. However, this reduction in costs is contingent on firm performance and information quality. This study acts as a first-step in examining in more depth the internal and external responses to remediation of material weaknesses. Furthermore, this study implies and lends support to the argument that the lingering effects of internal control issues are mitigated through higher levels of performance and information quality.

Authors

• Robert Felix, University of Baltimore

• Amanda Lyn Wilford, Southern Utah University