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The Impact of Section 302 and 404(b) Internal Control Disclosures on Prospective Investors' Judgments and Decisions: An Experimental Study
Author(s) -
Church Bryan K.,
Schneider Arnold
Publication year - 2016
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/ijau.12065
Subject(s) - accounting , credibility , control (management) , audit , business , investment (military) , voluntary disclosure , auditor's report , weakness , psychology , actuarial science , economics , medicine , political science , law , management , politics , anatomy
This paper reports the results of an experiment designed to investigate participants' reaction to quarterly and annual internal control disclosures. Quarterly disclosures include managers' disclosure of no control deficiencies, a significant deficiency, or a material weakness. Annual disclosures include the auditors' opinion on internal control, which either affirms managers' earlier disclosure or reveals new information. We find that participants react negatively to the disclosure of a material weakness, as might be expected. Participants invest less in a target company when internal control is ineffective rather than effective. By comparison, participants do not react negatively to the disclosure of a significant deficiency. Indeed, we find that they react positively to such disclosure accompanied by a clean (unqualified) audit opinion on internal control. Subsequent analyses indicate that participants' investment decisions are affected by their assessments of the reliability of financial statements and the credibility of management.