经济师培训课程
纽约时报Accruals Quality and Internal Control over Financial Reporting
Jeffrey Doyle
College of Business
Utah State University
3540 Old Main Hill
Logan, UT 84322
jeffrey.doyle@usu.edu
Weili Ge
University of Washington Business School
University of Washington
Mackenzie Hall, Box 353200
roger thatSeattle, WA 98195
geweili@u.washington.edu
Sarah McVay
Stern School of Business
New York University
44 West Fourth Street, Suite 10–94
New York, NY 10012
u.edu
January 24, 2007
The Accounting Review, forthcoming
We would like to thank two anonymous reviewers, Dan Cohen, Patty Dechow, Dan Dhaliwal (the Edi
tor), Ilia Dichev, Kalin Kolev, Russ Lundholm, Matt Magilke, Zoe-Vonna Palmro, Christine Petrovits, Cathy Shakespeare, Tom Smith, and Suraj Srinivasan for their helpful comments and suggestions. This paper has also benefited from comments received at the 2005 4-School Conference at Columbia University, the 2005 AAA Mid-West Regional Meeting, the 2006 AAA FARS Mid-Year Meeting, the 2006 Accounting and Finance Association of Australia and New Zealand Annual Meeting, the 2006 International Symposium on Audit Rearch Conference, and the University of Michigan.emba研修班
美味英文怎么说Accruals Quality and Internal Control over Financial Reporting
ABSTRACT
We examine the relation between accruals quality and internal controls using 705 firms that disclod at least one material weakness from August 2002 to November 2005 and find that weakness are generally associated with poorly estimated accruals that are not realized as cash flows. Further, we find that this relation between weak internal controls and lower accruals quality is driven by weakness disclosures that relate to overall company-level controls, which may be more difficult to “audit around.” We find no such relation for more auditable, account-specific weakness.
We find similar results using four additional measures of accruals quality: discretionary accruals, average accruals quality, historical accounting restatements, and earnings persistence. Our results are robust to the inclusion of firm characteristics that proxy for difficulty in accrual estimation, known determinants of material weakness, and corrections for lf-lection bias.
Keywords: earnings quality; accruals quality; internal control; material weakness.
Data Availability: All data ud in the paper are available from publicly available sources noted in the text; the data on internal control weakness are available in machine-readable form from the authors upon request.
I. INTRODUCTIONtake up什么意思
In this paper we examine the relation between accruals quality and the internal control environment of the firm. By definition, when there is a material weakness in internal control, there is “more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected” (PCAOB 2004, emphasis added). A weak control environment has the potential to allow both 1) intentionally biad accruals through earnings management (e.g., lack of gregation of duties) and 2) unintentional errors in accrual estimation (e.g., lack of experience in est
imating the bad-debt expen provision). Therefore, we hypothesize that reported material weakness will be associated with lower accruals quality.
While this relation has been suggested in prior literature (Kinney 2000), the lack of internal control data has generally precluded an empirical investigation and, therefore, the literature on earnings quality has been relatively silent on the matter of internal control over financial reporting. For example, neither of the two recent publications on earnings quality (Schipper and Vincent 2003; Dechow and Schrand 2004) mentions a possible relation between internal control and earnings/accruals quality. In this paper, we investigate this relation using a sample of 705 companies that disclod material weakness in internal control over financial reporting from August 2002 to November 2005 under the new requirements of Sections 302 and 404 of the Sarbanes-Oxley Act of 2002.1
Using the accruals quality measure developed by Dechow and Dichev (2002), as modified by McNichols (2002) and Francis et al. (2005), we generally find that weak internal
1Section 302 (applicable to all SEC filers and effective August 2002) requires that officers certify the financial statements, including the effectiveness of the internal control over financial reporting, and di英语三级考试真题
sclo any material changes in internal control. Section 404 (thus far effective November 2004 for accelerated filers only) requires management to issue a report on internal control over financial reporting that is subject to auditor attestation. Additional details are provided in Section II. Regardless of the origin of the material weakness disclosure, all el equal we expect the disclosures to be informative about the quality of firms’ accruals. We provide sample material weakness in Appendix A, Section II, and Section III.
controls are associated with relatively low quality accruals, as measured by weaker mappings of accruals into cash flows. This relation is robust to the inclusion of innate firm characteristics that proxy for the inherent difficulty in accrual estimation (e.g., length of the operating cycle and cash flow volatility; Dechow and Dichev 2002) and additional determinants of material weakness that are likely to be directly correlated with accruals quality (e.g., profitability and complexity; Ge and McVay 2005; Ashbaugh-Skaife et al. 2007; Doyle et al. 2007).
sheetingAlthough our focus is on the Dechow and Dichev (2002) measure, which we feel is both theoretically and intuitively appealing, we also consider other common proxies for accruals quality: discretionary accruals (Jones 1991), average accruals quality (Dechow and Dichev 2002), historical restatements (Anderson and Yohn 2002), and earnings persistence (Schipper and Vincent 2003). For each of thes
e measures, we find that weak internal controls are associated with lower accruals quality.
Finally, we find that the relation between weak internal controls and lower accruals quality is stronger for two groups of firms. First, only tho firms with company-level material weakness rather than more auditable, account-specific problems have lower accruals quality. The finding that account-specific material weakness are not associated with lower accruals quality is consistent with auditors detecting and correcting auditable weakness through incread substantive testing prior to the issuance of the financial statements (e.g., Hogan and Wilkins 2006).
Second, material weakness disclosures made under Section 302 (versus tho under Section 404) em to be more strongly associated with lower accruals quality. We find that, on average, Section 404 disclosures are not associated with poorer accruals quality. However, when disclosures are broken down by account-specific versus company-level weakness, company-
portfoliolevel Section 404 weakness are associated with poorer accruals quality. Although there are veral plausible explanations for the weaker results using the Section 404 disclosures, one obvious difference between Sections 302 and 404 is the incread level of scrutiny under Section 404, which requires an audit opinion on the internal controls by the external auditors. It is possible that external
mnuauditors applied a lower effective threshold for Section 404 compared to management’s threshold under Section 302 and therefore identified a greater number of material weakness that lacked real financial reporting conquences. We discuss the results and other possible explanations later in Section IV.
Our paper makes two primary contributions. First, we extend the literature on earnings/accruals quality. Conceptually, it makes n that a good internal control system is the foundation for high-quality financial reporting, since strong internal controls likely curtail both procedural and estimation errors, as well as earnings management. Our findings prent empirical evidence to support this fundamental link between internal controls and accruals quality. In addition, our paper extends this basic rearch question by 1) examining the types of material weakness (company-level versus account-specific), 2) distinguishing between the Section 302 versus 404 reporting regimes, 3) using a cross-ction of five earnings/accruals quality measures, and 4) controlling for lf-lection bias through the u of both a Heckman (1979) two-stage process and a propensity score matching approach (LaLonde 1986).
Second, our paper provides empirical evidence on the effectiveness of Sections 302 and 404 of Sarbanes-Oxley. The ctions have been among the most cumbersome of the new legislation, wit
h many critics alleging that the costs of compliance far exceed any benefits. We find that the most informative material weakness disclosures (i.e., tho that are associated with real economic events such as lower accruals quality) are tho that relate to more rious,
