Abstract
This paper investigates internal control restatements, i.e., companies and their auditors restating Section 404 internal control (IC) opinions from clean to adverse, after announcing financial statement restatements. We compare IC restatement companies with both companies that issue adverse IC opinions originally (initial ICMW companies) and companies that do not restate their prior period clean IC opinions after a financial statement restatement (no-IC restatement companies). We find that IC restatement companies are associated with lower likelihood of CFO and auditor turnover than the initial ICMW and no-IC restatement companies. Our cross-sectional analyses show that the low CFO and auditor turnover is mainly driven by IC restatement companies remediating ICMWs promptly, having transparent reporting practices and low earnings management incentives. Our results indicate that it is important for studies examining IC issues to distinguish between IC material weaknesses disclosed through IC restatements from those disclosed through original IC opinions.
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