Internal Control Weaknesses, financial restatements, and audit opinion:evidence from Brazilian market

Abstract

Objective: To analyze associations between Internal Control Weaknesses (ICWs), audit opinion, and Financial Restatements (FR) of companies listed in Brasil, Bolsa e Balcao B3, composing the IBrX 100. Method: This is a descriptive, archival, quantitative study. Data were obtained from Brazilian Security and Exchange Commission’s (CVM) website in the 2010-2018 period. Analysis was performed using descriptive statistics, test for differences of average/medians/proportions, Chi-square test, and analysis of correlations. Results: 23.27% of the observations presented at least one ICW; 35.58% of restatements were found on average, though only 2.73% were required by CVM. Additionally, 1.11% of the audit reports presented a qualified opinion. No association was found between ICW disclosure, financial restatements, and type of audit opinion. However, an association was found between ICW disclosure and emphasis paragraphs, suggesting the latter can signal weaknesses arising from weaknesses, though did not result in the auditors issuing a modified opinion. Contributions: This study provides an opportunity to discuss the role of regulators in investigating opinions issued by auditors and the misreporting of financial restatements.