Characteristics of Firms with Material Internal Control Weaknesses and the Impact on Audit Engagements

• In Event: Auditing

Abstract

The purpose of this study is to identify if there are firm characteristics that influence a material weakness in internal controls over financial reporting for U.S. public companies. This empirical research identifies if there is a relationship between internal control weakness and firm size, size of auditor, age, foreign translation, number of segments, restructuring, loss, risk of bankruptcy, merger and acquisition, and sales growth. Furthermore, this study examines if entity-level controls and account-level controls are affected by these characteristics. Due to significant changes within the economy caused by technology and globalization, there’s a need to evaluate how these characteristics impact internal control weakness with more recent data. Additionally, prior studies have provided mixed results on each construct; therefore, there’s a need to further investigate each relationship. This topic can help businesses, managers, and auditors identify areas of weaknesses to help diminish the risk of internal fraud. Moreover, the cost associated with internal fraud, and the risk of capital loss can be reduced if internal control weaknesses are addressed. This study will provide current results that will contribute to and extend existing literature.

Authors

• Pat Herndon, Jacksonville University

• Jill D'Aquila, Jacksonville University

• Daphne Wang, Jacksonville University