Determinants of the Persistence of Internal Control Weaknesses

ABSTRACT

This paper analyzes the degree to which material weaknesses (MWs) in internal control reported under the Sarbanes-Oxley Act of 2002 (SOX) affect the future reporting of MWs. Particularly, we examine information technology (IT) and non-IT MWs and their breakdown into specific IT-related entity-level, non-IT-related entity-level, and account-level deficiencies. Analysis reveals that most account-level and entity-level deficiencies occur at a significantly higher rate in SOX 404 reports with at least one IT MW than in MW reports with only non-IT MWs. Further, the presence and count of both types of MWs and all three types of deficiencies are associated with increased future MWs, as are lower profitability, non-Big 6 auditor, and firm complexity. Specific control deficiencies related to senior management, training, and IT control environment have the strongest impact on future MWs. These results indicate that effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting.

Keywords:  Sarbanes-Oxley Act of 2002, internal controls, information technology

Bonnie K. Klamm is an Associate Professor at North Dakota State University, Kevin W. Kobelsky is an Assistant Professor at the University of Michigan–Dearborn, and Marcia Weidenmier Watson is an Associate Professor at Mississippi State University.

Source : Bonnie K. Klamm, Kevin W. Kobelsky, and Marcia Weidenmier Watson (2012) Determinants of the Persistence of Internal Control Weaknesses. Accounting Horizons: June 2012, Vol. 26, No. 2, pp. 307-333.