AAA Spark Meeting of the Regions

The Power of the Pen and Disclosure of Internal Control Material Weakness

• In Event: Critical Audit Matters / Audit Disclosures

Abstract

This study examines the effects of media sentiment in the (0, +3) window relative to the restatement announcement on restating firms’ disclosure of ICMW (internal control material weakness). We find that negative media sentiment leads to a greater probability to disclose ICMW under SOX 404. The discipling is effective when the restatement is covered by more reputable media outlets. The effect of negative media sentiment on ICMW is driven by complex firms and more pronounced for firms with higher accounting expertise in the board and audit committee. We also find that restating firms are more likely to have fast remediation after disclosure of ICMW. When we control firms’ information bundling including “positive bundling” of good news and “noise bundling” of additional bad news, we find that the negative sentiment of more reputable media outlets can still increase restating firms’ probability to disclose ICMW. In addition, the discipling effect is effective on important types of ICMW including inventory-related and revenue-related ICMW. Collectively, our findings suggest that media sentiment helps to pressurize and motivate restating firms to disclose ICMW and remediate quickly.

Authors

• Fuzhao Zhou, Bowling Green State University

• Jianning Huang, University of Manitoba