395.E论房地产上市公司内部控制存在的问题及解决对策 外文原文

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1、Audit Committees, Boards of Directors and Remediation of Material Weaknesses in Internal ControlBeng Wee GohSchool of AccountancySingapore Management UniversityAbstract：This study examines whether the effectiveness of the audit committee and the board of directors is associated with firms timeliness

2、 in the remediation of material weaknesses (MWs) in internal control. The sample comprises accelerated filers that disclosed at least one MW from July 2003 to December 2004 under Section 302 of the Sarbanes-Oxley Act (SOX). Using logistic regression analyses, I find that firms with larger audit comm

3、ittees, audit committees with greater nonaccounting financial expertise, and more independent boards are more likely to remediate MWs in a timely manner. These results show that the audit committee and the board play an important role in monitoring the remediation of MWs. Overall, the study contribu

4、tes to our understanding of the effectiveness of the audit committee and the board under the SOX regime. The study also identifies important determinants of firms timeliness in the remediation of MWs, which is key to improving financial reporting quality and restoring investor confidence. Key words:

5、 Sarbanes-Oxley Act, internal control, audit committee, board of directors JEL codes: G30, G38, G39, M40, M42 1. IntroductionThe Sarbanes-Oxley Act (SOX) was passed in 2002 in response to a series of accounting improprieties at well-known companies such as Enron and Worldcom. One important aspect of

6、 SOX is the internal control requirements. Section 302 of the Act (SOX 302) requires that management evaluate the effectiveness of disclosure and control procedures, report results of the evaluation, and indicate any “significant changes” in internal controls since the last 10-K or 10-Q report (SEC

7、2002). In addition, Section 404 of the Act (SOX 404) requires that managements assessment of the effectiveness of internal control over financial reporting and auditors attestation on managements assessment of internal control over financial reporting be included infirms 10K reports (SEC 2003a) An a

8、ccelerated filer (a U.S. company with market capitalization over $75 million that has filed at least one annual report with the SEC) was required to comply with the SOX 404 requirements for its first fiscal year ending on or after November 15, 2004. A nonaccelerated filer, including a foreign privat

9、e issuer, must begin to comply for its first fiscal year ending on or after July 15, 2007. The heightened attention to internal control can enhance the reliability of financial statements by helping companies to identify internal control deficiencies and remediate these deficiencies in a timely mann

10、er1 Prior to SOX, little was understood about the remediation of internal control deficiencies due to the lack of publicly available data on internal controls. The remediation of internal control deficiencies is important because these deficiencies can undermine the quality of a firms financial repo

11、rting, as proxied by accruals quality (Ashbaugh-Skaife et al. 2007a; Doyle et al. 2007a), and the remediation of these deficiencies can improve the quality of financial reporting(Ashbaugh-Skaife et al. 2007a) Anecdotal evidence also suggests that internal control deficiencies lead to fraudulent fina

12、ncial reporting. In 1999, a study conducted by the Committee of Sponsoring Organizations of the Treadway Commission asserted that a poor internal control environment contributed to the occurrences of fraud documented over the 10-year time frame 1987-1997. Former SEC Commissioner Issac Hunt Jr., in h

13、is speech in 1999, also noted that “internal control deficiencies were undermining the financial reporting system” (Hunt 1999). Furthermore, Moodys has indicated that the existence of ongoing internal control problems can trigger negative rating action against the firm (Moodys 2006), highlighting th

14、e need for remediation of internal control deficiencies to restore confidence in financial reporting. The prompt remediation of these deficiencies also sends a strong signal to the market that the firm is committed to and competent in ensuring credible financial reporting. Following prior evidence t

15、hat the quality of the audit committee is associated with the quality of financial reporting and internal controls (Carcello and Neal 2000; Krishnan 2005), this study examines whether corporate governance mechanisms, specifically the audit committee and the board of directors, play an important role

16、 in monitoring the remediation of internal control deficiencies. Although the audit committee plays an important role in monitoring internal controls, the board of directors provides incremental oversight on internal controls as part of its fiduciary duties. Management often has self-interested ince

17、ntives that may not necessarily serve the best interests of shareholders. When internal control deficiencies are detected, management may not be willing to invest time and resources in remediating these deficiencies because such efforts divert attention and resources from the core businesses. Effect

18、ive audit committees and boards of directors can pressurize management to invest in remediation efforts, resulting in faster remediation of these deficiencies. Hence, I hypothesize a positive association between the effectiveness of the audit committee and the board, and firms timeliness in the reme

19、diation of internal control deficiencies. I collect data on 208 unique firms that are accelerated filers and disclosed at least one material weakness (MW) from July 2003 to December 2004 under SOX 302 According to Auditing Standards No. 2 (PCAOB 2004), a MW is a significant deficiency, or combinatio

20、n of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the companys abili

21、ty to record or report external financial data reliably in accordance with GAAP, such that there is more than a remote likelihood that a misstatement of a companys financial statements that is more than inconsequential will not be prevented or detected. I focus on firms that disclose MWs to avoid th

22、e self-selection issues associated with the voluntary disclosure of significant deficiencies (Doyle et al. 2007b) Although both MWs and significant deficiencies are deficiencies in the design or operation of internal controls, significant deficiencies are less severe and are not required to be publi

23、cly disclosed under SOX 302 (SEC 2004). Hence, the disclosure of significant deficiencies is clearly voluntary. On the other hand, under SOX 302, if management identifies a MW in their controls, they are precluded from reporting that the controls are effective and must disclose the identified MW. He

24、nce, the disclosure of MWs is effectively mandatory. According to Doyle et al. (2007b), there is some ambiguity regarding whether SOX 302 certifications require public disclosure of MWs, and whether some firms might interpret the MW disclosure requirement under SOX 302 as voluntary. The authors conc

25、lusion from the reading of the bulk of SEC guidance is that most firms are treating the disclosure as mandatory. Furthermore, MWs are the most severe type of internal control deficiencies and hence their remediation should be of greater concern to investors and regulators. The sample firms are ident

26、ified using Compliance Week, AuditAnalytics, and the sample firms used in Doyle et al. (2007b) Readers can refer to the 10-K report of Spatialight Inc. for the year ending December 31, 2005, for an example of how the audit committee questioned managements failure to ensure proper internal controls.

27、The example also highlights how the audit committee handled the remediation efforts and exercised its authority and oversight on management. I determine firms timeliness in the remediation of MWs based on whether the MWs are remediated within the subsequent SOX 404 reports. I measure the effectivene

28、ss of the audit committee by its independence, financial expertise, size, and meeting frequency, and the effectiveness of the board by its independence, size, and meeting frequency, and by the duality of the Chief Executive Officer (CEO) and Chairman positions (CEO duality). I also control for other

29、 factors that can affect firms timeliness in the remediation of MWs, Such as the severity of MWs, firms profitability, the complexity of firms operations, and so on. An estimation of the ordered logistic regression model yields the following results, which are consistent with my hypotheses. First, t

30、he proportion of audit committee members with financial expertise is positively associated with firms timeliness in the remediation of MWs. However, this result only holds for nonaccounting financial expertise (i.e., expertise gained through experience supervising employees with financial reporting

31、responsibilities and overseeing the performance of companies) but not for accounting financial expertise (i.e., expertise gained through accounting-related experience in SEC reporting). Hence, the ability to effectively supervise and oversee the remediation process is more important than domain-spec

32、ific expertise in speeding up the remediation of MWs. Second, firms with larger audit committees are more likely to remediate MWs in a timely manner. This result is consistent with the view that a larger audit committee is more likely to question management on remediation efforts and meet with inter

33、nal control system personnel, which in turn speeds up the remediation of MWs. Third, I find that a more independent board is associated with timelier remediation of MWs, suggesting that a more independent board is less susceptible to the undue influence of management and more likely to exert pressur

34、e on management to remediate MWs. Taken together, these results show that the audit committee and the board play an important role in monitoring the remediation of MWs. Finally, the regression results show that firms with more severe MWs, lower profitability, and more complex operations are less lik

35、ely to remediate MWs in a timely manner. This paper makes several contributions. First, while there is a growing body of literature examining the determinants of internal control deficiencies, this study abstracts from these studies by examining how the effectiveness of corporate governance mechanis

36、ms affects firms timeliness in the remediation of MWs. Because such deficiencies, especially when allowed to persist, expose firms to the risk of frauds and undermine the credibility of financial reporting, the results of this study can enhance our understanding of important factors that are necessa

37、ry to achieve a sound financial reporting system and to restore investor confidence. This study also identifies other important determinants of firms timeliness in the remediation of MWs, namely, the severity of MWs, firms profitability, and the complexity of firms operations. Second, this study con

38、tributes to the literature on the effectiveness of corporate governance mechanisms, especially in the post-SOX period. The study also sheds light on the efficacy of SOX requirements on the composition of the audit committee. The lack of significant results for audit committee independence may sugges

39、t a convergence of this attribute under the SOX regime, such that it no longer distinguishes between firms in terms of their governance strength. However, I do find that a larger audit committee and a more independent board both help to ensure timelier remediation of MWs. Hence, firms can further ti

40、ghten their corporate governance under the SOX regime by expanding their audit committees and by adding more independent directors to their boards. Given the debate over the definition of financial expertise under SOX, this study shows that nonaccounting financial expertise is a valuable component o

41、f the governance expertise of audit committee members. This lends support to the final provisions of SOX, which expand the definition of financial expertise to include nonaccounting expertise. Third, this study complements other related studies. Krishnan (2005) finds a positive relation between audi

42、t committee quality and the incidence of internal control problems in the pre-SOX period. However, her study uses a restricted sample of firms that are smaller and that change auditors in the pre-SOX period. This study extends Krishnan (2005) by examining the remediation of MWs, and by using firms t

43、hat are larger (due to their accelerated filer status) and that are required to disclose MWs under SOX 302. This study also complements Ashbaugh-Skaife et al. (2007a), who find that the remediation of internal control deficiencies improves the quality of a firms financial reporting. The results of t

44、his study suggest that effective audit committees and boards can improve the quality of financial reporting by ensuring the timely remediation of MWs. The next section develops the hypotheses. Section 3 describes the research method and the data. Section 4 presents the empirical results and Section

45、5 presents the supplemental analyses. Section 6 concludes and discusses implications and limitations. 2. Hypothesis development2.1 Audit committee effectiveness and the remediation of MWs The SEC has stated that the audit committee is an important element of corporate governance and is instrumental

46、in ensuring the quality of financial reporting. Audit committees are required by SEC disclosure rules to include a statement regarding their oversight responsibilities in the firms proxy statements (SEC 2000). Although prior to SOX there were no regulatory requirements that audit committees monitor

47、internal controls, studies have shown that audit committee members view monitoring internal controls as one of their responsibilities (Carcello et al. 2002; DeZoort 1997). Given the recent breakdowns in internal controls at several high-profile companies such as Enron and Worldcom, regulatory requir

48、ements on the audit committees role in internal controls have tightened. For instance, the SEC (2003b) mandates that all material written communications between a companys accountant and management be provided to the entitys audit committee, and this includes “reports on observations and recommendat

49、ions on internal controls.” Furthermore, Section 301 of SOX (SOX 301) states that “the audit committee is responsible for establishing procedures for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal controls, and auditing.” Studies have shown

50、that the quality of the audit committee is positively associated with the quality of the firms internal controls. Krishnan (2005) uses a sample of firms that changed auditors over the period 1994-2000 and finds that independent audit committees and audit committees with financial expertise are signi

51、ficantly less likely to be associated with internal control problems. Zhang et al. (2007) use a sample of firms that disclosed internal control deficiencies after the enactment of SOX and find that these firms are more likely to have audit committees that have less financial expertise. If audit comm

52、ittee quality is associated with the quality of internal controls, it seems reasonable to believe that a more effective audit committee will ensure timelier remediation of MWs in order to maintain the effectiveness of internal controls. An effective audit committee can directly engage in overseeing

53、the firms controls by reviewing internal accounting procedures and controls with the financial and accounting staff. When MWs are detected, an effective audit committee is more likely to take a hands-on approach and discuss with the internal and external auditors on how to remediate MWs. By diligent

54、ly following up on recommendations to improve internal controls and monitoring the progress of the remediation efforts closely, a more effective audit committee is likely to result in timelier remediation of MWs. While the audit committee monitors internal controls, management is ultimately held res

55、ponsible for implementing proper internal controls. Because the remediation of MWs is often costly and can divert attention away from the core businesses, management may be unwilling to engage actively in such remediation efforts. Research has shown that an effective audit committee can have a stron

56、g influence on management, such as constraining managements earnings manipulation (Klein 2002a), and influencing management to employ an industry specialist auditor (Abbott and Parker 2000). Hence, I expect an effective audit committee to exert a strong influence on management to invest the time and

57、 resources in remediation efforts. An effective audit committee is more likely to question whether management has exercised sufficient diligence in ensuring proper controls. By exerting its authority, the audit committee set a strong “tone at the top” that can raise managements proactiveness in reme

58、diating MWs Krishnan (2005) also maintains that the quality of an entitys internal control is a function of the quality of its control environment, which includes the board of directors and the audit committee. By examining both audit committee and board characteristics, this study can provide evide

59、nce on the relative contribution of each component in monitoring the remediation of MWs.The above discussions lead to the following hypothesis: HYPOTHESIS 1: The effectiveness of the audit committee is positively associated with firms timeliness in the remediation of MWs. 2.2 Board effectiveness and

60、 the remediation of MWs Although the audit committee plays an important role in monitoring the remediation of MWs, the board of directors can provide incremental oversight on the remediation process Readers can refer to the 10-K report of Curon Medical Inc. for the year ending December 31, 2004, for

61、 an example of how the board directed management to implement corrective measures on the internal control deficiencies.Within large corporations, agency conflicts arise due to the separation of ownership and control (Fama and Jensen 1983). To deal with these conflicts and to protect shareholders int

62、erests, the board assumes an oversight role that involves monitoring top management, approving the corporations strategy, monitoring the internal control system, and ensuring the quality of financial reports. Because MWs open a window of opportunity for management to engage in incongruent behaviors,

63、 the board can discharge its fiduciary duties in monitoring management by ensuring that management take prompt actions to remediate MWs and maintain internal control quality.8 Studies have shown that the board can oust top management from the firm for aggressive accounting (Desai et al. 2006). If th

64、e board imposes similar disciplinary actions on top management for internal control failures, this can create a strong pressure for top management to remediate MWs promptly. A more effective board is likely to have a stronger influence on management and monitor the actions of management. For instanc

65、e, studies have shown that a more effective board can deter managerial actions leading to frauds and SEC enforcement actions (Beasley 1996; Dechow et al. 1996). Weisbach (1998) also finds that a more effective board increases the likelihood of CEO turnover due to poor financial performance. Hence, I

66、 expect a more effective board to result in timelier remediation of MWs. HYPOTHESIS 2: The effectiveness of the board is positively associated with firms timeliness in the remediation of MWs. 3. Research method and data3.1 Measurement of firms timeliness in the remediation of MWs Managements disclosure of MWs often consists of a list of problems, and it is difficult to tr