外文翻譯-財務報告內(nèi)部控制缺陷的影響因素

中小企業(yè)貨幣資金內(nèi)部控制探討—以A汽車配件廠為例翻譯題目財務報告內(nèi)部控制缺陷的影響因素財務報告內(nèi)部控制缺陷的影響因素原文出處:JeffreyDoyle，WeiliGe，SarahMcVay：DeterminantsofWeaknessesinInternalControloverFinancialReporting.JournalofAccountingandEconomics,2007摘要：我們從779個公司2002年8月至2005年8月財務報表披露的重大缺陷來研究內(nèi)部控制的影響因素。我們發(fā)現(xiàn)，這些企業(yè)往往是更小，更年輕，經(jīng)濟實力較弱，更復雜，增長迅速，或正在進行重組的。擁有更嚴重的實體范圍的控制問題的公司是較小的，年輕的和有較弱的經(jīng)濟，而不太嚴重，帳戶的具體問題的公司是健康的財政，但有操作復雜化，多樣化，和迅速變化的業(yè)務。最后，我們發(fā)現(xiàn)，影響因素是根據(jù)各不相同基礎的重大缺陷的具體原因，這符合每個企業(yè)面臨著自己的一套獨特的內(nèi)部控制的挑戰(zhàn)。關鍵詞：內(nèi)部控制；重大缺陷；薩班斯-奧克斯利法案1.介紹在本文中，我們研究了財務報告內(nèi)部控制重大缺陷的因素。一個內(nèi)部控制的重大缺陷被定義為“一個重要的不足，或結(jié)合重大缺陷，導致超過一個年度或中期財務報表重大錯報不會被阻止或檢測到一個遠程的可能性”。我們用樣本公司研究財務報告內(nèi)部控制的重大缺陷，根據(jù)2002年的“薩班斯-奧克斯利法案”的第302和404條，時間是從2002年8月至2005年8月。根據(jù)第302條，證券交易委員會注冊的高管須證明他們評估其財務報告內(nèi)部控制的有效性。如果管理者認為重大缺陷在其控制中，他們不能認為報告內(nèi)部控制是有效的，必須披露其重大缺陷。第404條規(guī)定，每一份年度報告要包括管理的內(nèi)部控制結(jié)構和程序，證明該公司的會計師對發(fā)行人財務報告的有效性進行評估。在“薩班斯-奧克斯利法案”頒布之前，公司被要求必須保持足夠的內(nèi)部控制制度。雖然以前有研究這關于個披露的有限披露，但關于薩班斯-奧克斯利法案的新制度下企業(yè)內(nèi)部控制質(zhì)量一般很少有證據(jù)。我們調(diào)查是否財務報告內(nèi)部控制的重大缺陷與以下幾點有關：1）企業(yè)規(guī)模，通過公平的市場價值衡量；2）企業(yè)年齡，通過數(shù)年該公司擁有CRSP的數(shù)據(jù)測量；3）財務狀況，測量合計虧損指標變量和破產(chǎn)的可能性在一個代理根據(jù)由沙姆韋開發(fā)的風險模型；4）財務報告的復雜性，由特殊目的實體報告的數(shù)量來衡量，報告分部的數(shù)量，并存在外國貨幣換算；5）快速增長，衡量的合并和收購支出和極端的銷售增長；6）重組費用；7）公司治理結(jié)構。我們的樣本包括970個獨特的公司，這些公司財務報告在2002年8月至2005年8月至少有一個重大缺陷，其中有779個基于統(tǒng)計數(shù)據(jù)。我們確定這些公司，通過結(jié)合搜索網(wǎng)站，這個網(wǎng)站經(jīng)過跟蹤后，會將薩班斯-奧克斯利法案的內(nèi)部控制披露和EDGAR數(shù)據(jù)庫中的10-K提交給搜索。通過這些樣本，我們發(fā)現(xiàn)，財務報告內(nèi)部控制存在重大缺陷的可能是更小，更年輕，經(jīng)濟實力較弱，更復雜，發(fā)展迅速，和或正在進行重組的公司。我們的研究結(jié)果也出現(xiàn)確定公司重大缺陷的經(jīng)濟意義。例如，聯(lián)合我們的主要模型的邊際效應，大大增加對重大缺陷的預測概率—從3.75％至26.41%。在本文中，我們只關注導致重大缺陷的于兩個原因。首先，它是最嚴重類型的內(nèi)部控制缺陷，因而為我們的影響因素測試提供了最大功率。其次，披露的重大缺陷，實際上是強制性的，同時披露“重大缺陷”是毫不含糊地的自愿。針對這些強制性披露，有助于避免與自愿披露相關的自我選擇的問題。雖然是有效的強制性披露重大缺陷，但它可能是個別公司或?qū)徲嫀煾鶕?jù)不同的標準去披露。雖然我們沒有一個重大缺陷的實質(zhì)性模型，但我們的影響因素的結(jié)果類似阿什博等人的研究結(jié)果。阿什博等人檢查各類重大缺陷，并發(fā)現(xiàn)該公司披露重大缺陷通常有更復雜的操作。因此，我們的結(jié)果擴展到更廣泛的樣本，不依賴于什么構成了潛在的主觀判斷“重大缺陷”。阿什博等人主要研究所有重大缺陷，包括明確自愿披露，在他們的分析披露中還包括額外的變量模型的選擇。但我們的重點是對重大缺陷的披露，在我們的主要分析中不包括這些變量。除了我們有關公司重大缺陷的一般結(jié)果，補充和印證的并發(fā)研究的結(jié)果，我們不同阿什博等人。如：研究重大缺陷披露的特定類型，以及基于這些不同類型的重大缺陷披露對內(nèi)部控制的影響。我們發(fā)現(xiàn)，研究影響因素時，內(nèi)部控制問題的類型是一個重要因素，所以在以后應考慮對內(nèi)部控制的研究。具體來說，我們注重重大缺陷，這最嚴重的內(nèi)部控制問題，這些缺陷有很大的不同方面的嚴重性和根本原因。接下來我們研究的是公司在不同基礎上重大缺陷的影響因素，如人員編制問題（如職責分離）；復雜性問題（例如，在計算遞延稅時的麻煩）；或一般問題（例如，缺乏配套的文檔）。這并不奇怪，公司披露人員編制問題與其他公司披露重大缺陷相比可能比較小。這些公司有最弱的財政，擁有最高損失的發(fā)病率和最高的破產(chǎn)風險。公司披露重大缺陷涉及到的往往是規(guī)模最大，歷史最悠久的公司，他們擁有最復雜和多元化的經(jīng)營。此外，相比一般的公司，這些公司有更加多樣化和復雜的操作，也往往有較弱的財政和較高的重組費用。因此，復雜的操作，與相對較差的財務狀況和快速變化的環(huán)境相結(jié)合，似乎為這些企業(yè)帶來困難的財務報告問題。研究企業(yè)提供更一般的重大缺陷披露時，我們發(fā)現(xiàn)，每個檢查結(jié)構往往要與這些公司披露相關聯(lián)，包含許多不同的缺陷（如不足和解程序，確認收入的問題，或缺乏完整的政策和程序）。作為最終的分析，我們只研究公司與有關收入確認問題的重大缺陷，并發(fā)現(xiàn)這些披露與公司治理的代理負相關。2．假設第一，公司的規(guī)?？赡苁且粋€良好的內(nèi)部控制的影響因素。直觀地說，大公司可能有更多的財務報告流程和程序到位，更可能有足夠的數(shù)量，以確保適當職責分工。大型企業(yè)的員工也更容易制定和實施內(nèi)部控制，享受規(guī)模經(jīng)濟系統(tǒng)。此外，他們往往有更多的資源，把錢花在內(nèi)部審計或顧問費，這可能有助于產(chǎn)生強有力的內(nèi)部控制。但大企業(yè)也往往是更加復雜，因此，我們希望在大公司找到較少的控制缺陷。第二，另一個因素可能決定發(fā)生的過程和程序是公司的年齡。越老的公司在其內(nèi)部控制程序會更加的扭結(jié)。因此，我們希望在老公司找到更少控制的缺陷。第三，一個強有力的內(nèi)部控制的影響因素可能是一家公司的財務狀況。業(yè)績不佳的公司根本未必能夠充分的時間和/或金錢投資在適當?shù)目刂啤Ｎ覀兿Ｍ业骄哂休^強的財務狀況，但企業(yè)的內(nèi)部控制缺陷更少。我們研究兩個財政資源的措施，總損失和破產(chǎn)的風險。第四，企業(yè)的經(jīng)營環(huán)境。第五，影響內(nèi)部控制缺陷的可能因素是快速增長。第六，我們希望正在進行重組的企業(yè)有相對更多的內(nèi)部控制缺陷。首先，重組往往導致重整期間和之后，在精簡部門，經(jīng)驗豐富的員工流失，和一般的混亂，公司內(nèi)部控制制度必須更新以匹配新的組織結(jié)構。第二，重組通常涉及許多困難的權責發(fā)生制的估計和調(diào)整。人員不足，加上更多的會計估計，可能導致更多的內(nèi)部控制缺陷。第七，公司的治理層。3．樣本選擇遵守周（關于“薩班斯-奧克斯利法案”相關的合規(guī)問題的網(wǎng)站）自2003年11月以來，已收集和發(fā)布公司披露內(nèi)部控制缺陷的月度報告。我們匯總這些每月遵守周刊披露，獲得877個披露。我們只包括那些企業(yè)，這些企業(yè)將內(nèi)部控制問題作為一個重大的缺陷，是最嚴重的內(nèi)部控制缺陷，消除239非物質(zhì)缺陷披露。在隨后披露的由同一家公司的事件，我們保留披露，以幫助我們的類型分析，但不包括公司多次在我們的樣本，描述性統(tǒng)計，統(tǒng)計測試。有97個這樣重復披露。要補充我們的樣本，我們還可以搜索EDGAR數(shù)據(jù)庫中的10-KS從2002年8月（第302條頒布之日起）至2005年8月使用關鍵字“重大缺陷”，并確定一個額外的429重大缺陷的企業(yè)，從而確定共970不同的公司披露至少有一個重大缺陷?？傊?，我們的樣本時間是遠遠超過其他并發(fā)工作更長的時間，我們研究了整整三年，其中包括第302和404的披露。4．測試假設的方法（1）單因素分析和描述性統(tǒng)計（2）多元統(tǒng)計分析（3）重大缺陷類型分析5．總結(jié)和結(jié)論最近在2002年出臺的薩班斯-奧克斯利法案規(guī)定所有證券交易委員會必須公開披露財務報告內(nèi)部控制的重大缺陷。過去的研究一直局限于內(nèi)部控制缺陷披露，公司的審計員創(chuàng)造了一個非常有限的信息源。使用強制性的重大缺陷披露需要更全面的樣本，所以根據(jù)薩班斯-奧克斯利法案的第302和404條，時間從2002年8月至2005年8月，我們研究重大缺陷的影響因素。我們表明，存在內(nèi)部控制重大缺陷更可能是更小，更有利可圖，更復雜，增長迅速，或正在進行重組的公司。這些結(jié)果是符合在企業(yè)面對資源缺乏，復雜的會計問題，和瞬息萬變的商業(yè)環(huán)境中掙扎的財務報告控制。我們還記錄，這些影響因素的強度取決于重大缺陷披露的類型而有所不同。這一發(fā)現(xiàn)為今后研究內(nèi)部控制缺陷的影響因素提供信息。這項研究的一個潛在的局限性是我們收集數(shù)據(jù)和進行測試只用了很短的時間。這很難確定，在“薩班斯-奧克斯利”法案的新政權的最初幾年的重大缺陷披露與今后一個時期是否一致。因為在以后的時期管理者和審計人員對內(nèi)部控制的實施、評估和報告過程會相對比較熟悉。此外，我們試圖在2002年8月至2005年8月的披露案中全面收集重大缺陷的披露，但它仍然是可能的，只要找齊一些企業(yè)沒有發(fā)現(xiàn)或披露的重大缺陷的真正樣品。根據(jù)這些公司的系統(tǒng)的特點，這可能影響我們的結(jié)果。未來的研究可能會嘗試模擬這個關鍵性的決定。DeterminantsofweaknessesininternalcontroloverfinancialreportingAbstractWeexaminedeterminantsofweaknessesininternalcontrolfor779firmsdisclosingmaterialweaknessesfromAugust2002toAugust2005.Wefindthatthesefirmstendtobesmaller,younger,financiallyweaker,morecomplex,growingrapidly,orundergoingrestructuring.Firmswithmoreseriousentity-widecontrolproblemsaresmaller,youngerandweakerfinancially,whilefirmswithlesssevere,account-specificproblemsarehealthyfinanciallybuthavecomplex,diversified,andrapidlychangingoperations.Finally,wefindthatthedeterminantsalsovarybasedonthespecificreasonforthematerialweakness,consistentwitheachfirmfacingtheirownuniquesetofinternalcontrolchallenges.Keywords：InternalControl;MaterialWeakness;Sarbanes-Oxley1．IntroductionInthispaperweexaminethedeterminantsofmaterialweaknessesininternalcontroloverfinancialreporting.Amaterialweaknessininternalcontrolisdefinedas“asignificantdeficiency,orcombinationofsignificantdeficiencies,thatresultsinmorethanaremotelikelihoodthatamaterialmisstatementoftheannualorinterimfinancialstatementswillnotbepreventedordetected”(PCAOB,2004).WeuseasampleofcompaniesthatdisclosedmaterialweaknessesininternalcontroloverfinancialreportingunderSections302and404oftheSarbanes-OxleyActof2002fromAugust2002toAugust2005.UnderSection302,SECregistrants’executivesarerequiredtocertifythattheyhaveevaluatedtheeffectivenessoftheirinternalcontrolsoverfinancialreporting.Ifmanagementidentifiesamaterialweaknessintheircontrols,theyareprecludedfromreportingthatthecontrolsareeffectiveandmustdisclosetheidentifiedmaterialweakness(SEC,2002andSEC,2004).Section404requiresthateachannualreportincludeanassessmentbymanagementoftheeffectivenessoftheinternalcontrolstructureandproceduresoftheissuerforfinancialreportingthatisattestedtobythefirm’spublicaccountants.AlthoughfirmswererequiredtomaintainanadequatesystemofinternalcontrolbeforetheenactmentofSarbanes-Oxley,theywereonlyrequiredtopubliclydisclosedeficienciesiftherewasachangeinauditor(SEC,1988).Whilepriorresearchstudiesthislimitedsetofdisclosures(Krishnan,2005),thereislittleevidenceregardinginternalcontrolqualityforfirmsingeneralunderthenewSarbanes-Oxleyregime.Weinvestigatewhethermaterialweaknessesininternalcontrolareassociatedwith1)firmsize,measuredbymarketvalueofequity;2)firmage,measuredbythenumberofyearsthefirmhasCRSPdata;3)financialhealth,measuredbyanaggregatelossindicatorvariableandaproxyforthelikelihoodofbankruptcybasedonthehazardmodeldevelopedbyShumway(2001);4)financialreportingcomplexity,measuredbythenumberofspecialpurposeentitiesreported,thenumberofsegmentsreported,andtheexistenceofaforeigncurrencytranslation;5)rapidgrowth,measuredbymergerandacquisitionexpendituresandextremesalesgrowth;6)restructuringcharges;and7)corporategovernance,measuredusingthegovernancescoredevelopedbyBrownandCaylor(2004).Oursampleiscomprisedof970uniquefirmsthatreportedatleastonematerialweaknessfromAugust2002toAugust2005,ofwhich779haveCompustatdata.WeidentifythesefirmsthroughacombinationofasearchofComplianceWeek,awebsitewhichtracksinternalcontroldisclosuresafterSarbanes-Oxley,andasearchof10-KfilingsintheEDGARdatabase.Forthefullsample,wefindthatmaterialweaknessesininternalcontrolaremorelikelyforfirmsthataresmaller,younger,financiallyweaker,morecomplex,growingrapidly,and/orundergoingrestructuring.Thesefirm-specificcharacteristicsseemtocreatechallengesforcompaniesinmaintainingastrongsystemofinternalcontrols.Ourfindingsalsoappeartobeeconomicallysignificantinidentifyingfirmswithmaterialweaknesses.Forexample,thejointmarginaleffectofourmainmodel(i.e.,thechangeinthepredictedprobabilityofamaterialweaknesswhenalteringtheindependentvariablesinthepredicteddirectionbetweenthe1stand3rdquartilesorbetweenzeroandoneforindicatorvariables)greatlyincreasesthepredictedprobabilityofamaterialweakness—from3.75percentto26.41percent.Inthispaper,wefocussolelyonmaterialweaknessesfortworeasons.First,itisthemostseveretypeofinternalcontroldeficiency,andthusoffersthegreatestpowerforourdeterminantstests.Second,thedisclosureofmaterialweaknessesiseffectivelymandatory,whilethedisclosureof“significantdeficiencies”isunambiguouslyvoluntary.Focusingonthesemoremandatorydisclosureshelpsavoidself-selectionissuesassociatedwithvoluntarydisclosures.Althoughdisclosuresofmaterialweaknessesareeffectivelymandatory,itispossiblethatindividualfirmsorauditorsapplydifferentmaterialitystandardsindecidingwhattodisclose.Whilewedonothaveamodelofthematerialitythresholdofmaterialweaknesses(Mayper,1982;Mayperetal.,1989;Messieretal.,2005),ourdeterminantsresultsaresimilartothosedocumentedbyAshbaugh-Skaifeetal.(2006)whoexaminealltypesofsignificantdeficiencies(i.e.,notjustthoseinternalcontrolweaknessesthatmeetthethresholdtobeclassifiedas“materialweaknesses”)andfindthatfirmsdisclosingsignificantdeficienciestypicallyhavemorecomplexoperations,recentchangesinorganizationstructure,moreaccountingriskexposure,andfewerresourcestoinvestininternalcontrol.Therefore,itappearsthatourresultsextendtoabroadersamplethatdoesnotrelyonapotentiallysubjectivejudgmentofwhatconstitutesa“materialweakness,”althoughitisstillpossiblethatthebroadersampleinAshbaugh-Skaifeetal.(2006)suffersfromthesameconcern.SinceAshbaugh-Skaife(2006)focusonallsignificantdeficiencies,includingunambiguouslyvoluntarydisclosures,theyalsoincludeadditionalvariablestomodelthechoicetodiscloseintheiranalyses.Sinceourfocusisonmaterialweaknessdisclosures,wedonotincludethesevariablesinourmainanalysis.However,inuntabulatedresults,ourresultsarerobusttotheirinclusionwiththeexceptionofsalesgrowth,whichweakensconsiderably.Furthermore,andinsupportofourdisclosuresbeingmoremandatoryinnature,threeoftheirfour“incentivetodisclose”variablesareinsignificantwhenincludedforoursample.Inadditiontoourgeneralfindingsaboutmaterialweaknessfirms,discussedabove,whichcomplementandcorroboratethefindingsofconcurrentstudies,wedifferfromAshbaugh-Skaifeetal.(2006)andothersbyexaminingthespecifictypesofmaterialweaknessesdisclosed,andhowthedeterminantsofinternalcontrolproblemsdifferbasedonthesetypes.Wefindthatthetypeofinternalcontrolproblemisanimportantfactorwhenexaminingdeterminants,andthusshouldbeconsideredbyfutureresearchoninternalcontrol.Specifically,whilewefocusonmaterialweaknesses,themostsevereinternalcontrolproblems,theseweaknessesvarywidelywithrespecttoseverityandunderlyingreason.Wenextexaminewhetherthedeterminantsdifferbasedonwhetherthefirmattributesitsmaterialweaknesstostaffingissues(e.g.,segregationofduties),complexityissues(e.g.,troubleincalculatingthedeferredtaxprovision)ormoregeneralissues(e.g.,lackofsupportingdocumentation).Notsurprisingly,firmsdisclosingstaffingproblemsaremuchmorelikelytobesmallerandyoungerthanotherfirmsdisclosingmaterialweaknesses.Thesefirmsalsotendtobetheweakestfinancially,withthehighestincidenceoflossesandthehighestbankruptcyrisk.Resourceconstraintslikelyhindertheabilityofsuchfirmstoadequatelystafftheiroperationswithcompetentpersonnel.Firmsdisclosingmaterialweaknessesrelatedtocomplexityarethelargestandoldestcompaniesofthethreegroupsandhavethemostcomplexanddiversifiedoperations.Inaddition,whencomparedtotheaverageCompustatfirm,thesefirmscontinuetohavemorediversifiedandcomplexoperations,andalsotendtobeweakerfinanciallyandhavehigherrestructuringcharges.Thus,complexoperations,combinedwithrelativelypoorfinancialhealthandaquicklychangingenvironment,appeartoyielddifficultfinancialreportingissuesforthesefirms.Whenexaminingfirmsprovidingmoregeneralmaterialweaknessdisclosures,wefindthateachoftheconstructsexaminedtendstobeassociatedwiththesefirmdisclosures,consistentwiththissubgroupcontainingmanydifferingweaknesses(e.g.,inadequatereconciliationprocedures,revenuerecognitionproblems,oracompletelackofpoliciesandproceduresinplace).Asafinalanalysis,weexamineonlythosefirmswithmaterialweaknessesrelatedtorevenuerecognitionproblemsandfindthatthesedisclosuresarenegativelyassociatedwithourproxyforgoodcorporategovernance.Inthenextsectionwediscussthenewrequirementsoninternalcontroldisclosures,priorresearch,andourhypotheses.InSection3,wediscussoursampleselectionprocedureandthedataitemsusedasconstructproxies.Section4describesthemethodologyusedtotestourhypothesesanddiscussestheresults.WesummarizeandconcludeinSection5.2.hypothesesAsreviewedabove,thereislimitedguidancefrompriorresearchregardingthedeterminantsofinternalcontrolquality.Thus,whileweattempttoincorporatethisliteratureintheformulationofourhypotheses,ourstudymaybeviewedasexploratoryinnature,andafirststepinexaminingthedeterminantsofinternalcontrolquality.Tobegin,priorresearchhypothesizesthatfirmsizemaybeadeterminantofgoodinternalcontrol(e.g.,KinneyandMcDaniel,1989;DeFondandJiambalvo,1991),thoughtheevidenceismixed(DeFondandJiambalvo,1991;Krishnan,2005).Intuitively,largefirmslikelyhavemorefinancialreportingprocessesandproceduresinplaceandaremorelikelytohaveanadequatenumberofemployeestoensurepropersegregationofduties.Largerfirmsarealsomorelikelytoenjoyeconomiesofscalewhendevelopingandimplementinginternalcontrolsystems.Moreovertheytendtohavegreaterresourcestospendoninternalauditorsorconsultingfees,whichmayaidinthegenerationofstronginternalcontrol.Forexample,thereisastrongpositiveassociationbetweennon-auditfeesandfirmsize(e.g.,DeFondetal.,2002;Frankeletal.,2002).Onepossibleconfoundingfactorinpriorresearchisthatlargefirmsalsotendtobemorecomplexandengageinalargernumberandvarietyoftransactions.However,asdiscussedbelow,weexplicitlycontrolforcomplexityinourtests.Thusweexpecttofindfewercontrolweaknessesinlargerfirms,aftercontrollingforcomplexity.Wemeasurefirmsize(MARKETCAP)asthelogofthefirm’smarketvalueofequity.Anotherfactorthatlikelydeterminestheprocessesandproceduresinplaceistheageofthefirm.Theolderthefirm,themorelikelytheyaretohave“ironedoutthekinks”intheirinternalcontrolprocedures.Thus,weexpecttofindfewercontrolweaknessesinolderfirms.WedefineFIRMAGEasthelogofthenumberofyearsthefirmhasbeenpublic,measuredbythenumberofyearsthefirmhaspriceinformationonCRSP.Athirddeterminantofstronginternalcontrolmightbeafirm’sfinancialhealth.Poorlyperformingfirmssimplymaynotbeabletoadequatelyinvesttimeand/ormoneyinpropercontrols.Goodinternalcontrolrequiresbothfinancialresourcesandmanagementtime,andthismaynotbeapriorityforfirmsthatareconcernedaboutsimplystayinginbusiness.Consistentwiththishypothesis,pastresearchfindsthatfinancialreportingerrorsarenegativelyassociatedwithperformance(DeFondandJiambalvo,1991)andthattheexistenceofalossispositivelyassociatedwithreportinganinternalcontrolprobleminaudit-changefirms(Krishnan,2005).Weexpecttofindfewerinternalcontrolweaknessesinfirmswithstrongerfinancialhealth.Weexaminetwofinancialresourcemeasures,AGGREGATELOSS(whetherornotthesumofearningsbeforeextraordinaryitemsisnegativeforyearstandt–1)andBANKRUPTCYRISK,thedecilerankofthepercentageprobabilityofbankruptcyfromthehazarddefaultpredictionmodeldevelopedbyShumway(2001).Whileweexpectthesize,age,andfinancialresourcesofthefirmtoaffectitsabilitytoestablishproperinternalcontrols,theneedforinternalcontrolsisuniquetoeachfirm’sparticularoperatingenvironment.Asafirmengagesinmorecomplextransactionsandhasmorediverseoperations,weexpecttheneedforinternalcontroltobehigher,andthusexpectthecomplexityofthefirmtobeadriverofinternalcontrolweaknesses.Considerthecomplexityintroducedbyhavingmultiplegeographicorbusinessdivisions.Thesecompaniesfacechallengeswhenimplementinginternalcontrolconsistentlyacrossdifferentdivisionsandwhenconsolidatinginformationforfinancialstatements.Foreachdivision,differentfactorsmightaffecttheimplementationofadequateinternalcontrol.Forexample,foramultinationalcompany,thelocalinstitutionalandlegalenvironmentofeachlocationmightdiffer,andthusaffecttheeffectivenessofinternalcontrol.14Weexaminecomplexityusingthreemeasures:thelogofthenumberofspecialpurposeentitiesassociatedwiththefirm,SPEs,thelogofthesumofthenumberofoperatingandgeographicsegments,SEGMENTS,andtheexistenceofaforeigncurrencyadjustment,FOREIGNTRANSACTIONS(e.g.,DeFondetal.,2002;Bushmanetal.,2004).Afifthpossibledeterminantofinternalcontrolweaknessesisrapidgrowth.Aquicklygrowingfirmmayoutgrowanyinternalcontrolsithasinplace,andmayrequiretimetoestablishnewprocedures(KinneyandMcDaniel,1989;Stice,1991).Newpersonnel,processes,andtechnologyareusuallyneededtomatchtheinternalcontrolwiththefirm’sgrowth.Forexample,intheir200310-K,MarkWestEnergyPartnersdisclosed“inadequateimplementationofuniformcontrolsovercertainacquiredentitiesandoperations”asoneaspectoftheirmaterialweaknessininternalcontrol.Weconsidertwotypesofgrowth.Thefirst,ACQUISITIONVALUE,istheaggregatedollarvalueofacquisitionsthatresultinatleast50percentownershipoftheacquiredcompanyintandt–1scaledbytheacquiringfirm’syeartmarketcapitalization,asreportedbytheSDCPlatinumdatabase.Oursecondrapidgrowthmeasure,EXTREMESALESGROWTH,isanindicatorvariablethatisequaltooneifthefirm’syear-over-yearsalesgrowthisinthehighestquintileofsalesgrowthfortheirindustry,andzerootherwise.16Weexpectrapidgrowthtobepositivelyassociatedwithinternalcontrolweaknesses.Similarly,weexpectfirmsundergoingrestructuringtohaverelativelymoreinternalcontrolweaknesses.First,restructuringoftenresultsinthedownsizingofdepartments,thelossofexperiencedemployees,andgeneraldisarrayduringandafterthere-engineeringofthefirm—theinternalcontrolsystemmustbeupdatedtomatchtheneworganizationalstructure.Second,restructuringtypicallyinvolvesmanydifficultaccrualestimationsandadjustments.Insufficientstaff,togetherwithmoreaccountingestimation,likelyleadstomoreinternalcontroldeficiencies.Forexample,NortelNetworksdisclosedalackofcompliancewiththeestablishedproceduresformonitoringandadjustingbalancesrelatingtorestructuringchargesasamaterialweaknessintheirJune200310-Q.Aslargerrestructuringsarelikelytocauseproportionallylargerchallengesforinternalcontrol,wedefineRESTRUCTURINGCHARGEasacontinuousvariable,equaltoaggregaterestructuringchargesinyearstandt–1scaledbythefirm’syeartmarketcapitalization.17Weexpectmaterialweaknessestobemoreprevalentasfirmsrecordlargerrestructuringcharges.Finally,weexpectcorporategovernancetoplayaroleinafirm’sinternalcontrolquality.Krishnan(2005)findsthatfirmswithmoreeffectiveauditcommitteesreportfewerinternalcontrolproblemsintheir8-Kswhenreportinganauditorchange.Weexpectawell-governedfirmtoexhibitfewermaterialweaknesses,allelseequal.18WemeasurecorporategovernancewiththemeasuredevelopedbyBrownandCaylor(2004).GOVERNANCESCOREisacompositemeasureof51factorsencompassingeightcorporategovernancecategories:audit,boardofdirectors,charter/bylaws,directoreducation,executiveanddirectorcompensation,ownership,progressivepractices,andstateofincorporation.19WesummarizeeachofourdirectionalpredictionsandvariablemeasurementsinTable1.3.Data,sampleselectionAsmentionedabove,materialweaknessesininternalcontrolhaveonlybeenwidelydisclosedinSECfilingssinceAugustof2002.SinceNovember2003,ComplianceWeek(awebsitededicatedtoSarbanes-Oxleyrelatedcomplianceissues)hasbeencollectingandpublishingmonthlyreportsonfirmsthatdiscloseinternalcontroldeficiencies.WeaggregatethesemonthlyComplianceWeekdisclosures,obtaining877individualdisclosures.Weincludeonlythosefirmsthatclassifytheirinternalcontrolproblem(s)asamaterialweakness,themostsevereinternalcontroldeficiency,eliminating239non-materialweaknessdisclosures.Intheeventofasubsequentdisclosurebythesamefirm,weretainthedisclosuretoaidinourtypeanalysis,butdonotincludethefirmmultipletimesinoursample,descriptivestatistics,orstatisticaltests.Thereare97suchduplicatedisclosures.Tosupplementoursample,wealsosearch10-KsintheEDGARdatabasefromAugust2002(theenactmentdateofSection302)toAugust2005usingthekeyword“materialweakness,”andidentifyanadditional429materialweaknessfirms,therebyidentifyingatotalof970distinctfirmsthatdisclosedatleastonematerialweaknessfromAugust2002toAugust2005.22Wethenobtainfinancialdatafromthe2003annualCompustatdatabaseandeliminate191firmsthathaveinsufficientCompustatdata,resultinginafinalsampleof779materialweaknessfirms.23In175instances,thematerialweaknessfirmdoesnothaveavailabledatafor2003,butdoeshavedataavailableonCompustatforaprioryear.Inthesecases,wetakethemostrecentdataavailable(2002for163firms,2001forninefirms,and2000forthreefirms).Insummary,oursampleperiodismuchlongerthanthatofotherconcurrentworkasweexaminethreefullyears,includingbothSection302and404disclosures.Forexample,Ashbaugh-Skaifeetal.(2006)limittheiranalysistoSection302disclosuresintheyearpriortotheeffectivedateofSection404.Forourcontrolfirms,weuseall2003CompustatfirmswithavailablemarketvalueofequityandearningsbeforeextraordinaryitemsthatarenotinourmaterialweaknesssampleanddidnotappearonComplianceWeekashavingreportedalessseveresignificantdeficiency.Weusetheentirenon-materialweaknesspopulationasourcontrolgroup,ratherthanamatchedsample,toavoidchoice-basedsamplebias,whichcanleadtobiasedparametersandprobabilityestimates(Palepu,1986).WesummarizeoursamplecollectionprocedureinTable2.Itislikelythatmostmaterialweaknessesweredisclosed,asitisacriminaloffenseformanagerstoconcludethatcontrolsareeffectivewhentheyhaveknowledgeofamaterialweakness.However,theuseoftheproxyofadisclosureofamaterialweaknessversusthetrueunderlyingexistenceofaweaknessisalimitationofourstudy. 4.Results4.1UnivariateanalysisanddescriptivestatisticsTable3presentsdescriptivestatisticsonthecharacteristicsofmaterialweaknessfirmsandcontrolfirms.Italsopresentsone-tailedtestsofdifferencesbetweenthetwogroupsusingbotht-testsandWilcoxonrank-sumtests.Foreaseofinterpretation,eachsummarystatisticforthefourloggedvariables(MARKETCAP,FIRMAGE,SPEs,andSEGMENTS)isconvertedtoanunloggedamountinTable3.Forexample,themeanofthelogofMARKETCAPof5.193isunloggedtogeneratethe180.082valuethatispresentedinthefirstcolumn.[InsertTable3here]First,theresultsonfirmsize,asmeasuredbythelogofmarketcapitalization,seemtobemixed.Themeanvalueisweaklysignificantlysmallerformaterialweaknessfirms(usingat-test),butthemedianvalueisactuallyslightlylargerforthecontrolfirms,andtheWilcoxonrank-sumtestindicatesaninsignificantdifferencebetweenthetwogroups.Althoughtheseunivariateresultsaremixed,wehypothesizethatfirmsizeisadeterminantofinternalcontrolqualityaftercontrollingforcomplexity.Therefore,were-examinethisvariableinourmultivariateanalysisbelow.Next,aspredicted,firmswithmaterialweaknessesappeartobeyoungerthantheotherCompustatfirms.Themeanmaterialweaknessfirmhasbeenpubliclytradedfor8.3years,whilethemeancontrolfirmhasbeentradedfor9.1years.Ourfinancialhealthmeasures,AGGREGATELOSSandBANKRUPTCYRISK,bothindicatethatfirmsdisclosingmaterialweaknessesininternalcontrolaresignificantlyweakerfinanciallythantheaverageCompustatfirm,asexpected.Ourthreecomplexitymeasures,thelogofthenumberofsponsoredspecialpurposeentities(SPEs),thelogofthetotalnumberofoperatingandgeographicsegments(SEGMENTS),andtheexistenceofaforeigncurrencyadjustment(FOREIGNTRANSACTIONS),areallhigherformaterialweaknessfirms,providingpreliminarysupportforourhypothesisthataccountingcomplexitycreatesinternalcontrolchallenges.Thereisalsopreliminaryevidencethatrapidgrowthisadeterminantofinternalcontrolproblems.ACQUISITIONVALUEissignificantlyhigherformaterialweaknessfirmsthanourcontrolfirms(0.033versus0.023),andmaterialweaknessfirmsarealsomoreofteninthehighestquintileofindustry-adjustedsalesgrowth(0.222versus0.196).RESTRUCTURINGCHARGEformaterialweaknessfirmsismorethandoublethatforthecontrolfirms,lendingsupportfortheideathatsignificantrestructuring,withitsdisruptionstoestablishedprocesses,personnelturnover,anddifficultaccountingestimates,leadstointernalcontrolproblems.Finally,thereissomesupportthatwell-governedfirmshavefewermaterialweaknesses,withthet-testandWilcoxonrank-sumtestbothgeneratingweaklysignificantresults.IngeneralourunivariateresultsareconsistentwithourhypothesesoutlinedinSection2.2.However,asevidencedinTable4,manyofourmeasuresarecorrelatedwithoneanother.Forexample,MARKETCAP,FIRMAGE,SPEs,andSEGMENTSareall