Reporting Internal Control Deficiencies in the Post-Sarbanes-Oxley Era: The Role of Auditors and Corporate Governance

Abstract

This study addresses the role of audit committees and auditors in the reporting of internal control deficiencies after the passage of the Sarbanes Oxley Act (SOX). We find that a higher number of meetings of the audit committee, lesser proportion of experts in the audit committee, and more auditor changes characterize firms that report weaknesses in their internal controls compared to firms with no weaknesses. Prior restatements of financial statements are also higher for firms not reporting such weaknesses. The results are robust to controlling for a variety of firm characteristics such as complexity of operations, profitability, and growth. Our results underscore the importance of governance characteristics beyond general firm characteristics in examining the reporting of internal control weaknesses.