Wednesday, March 05, 2008

Current Research Questions on Internal Control over Financial Reporting Under Sarbanes-Oxley

from KPMG's "Audit Committee Insights" for March 5, 2008, originally published in the February 2008 issue of The CPA Journal.

The Sarbanes-Oxley Act (SOX) of 2002's requirements regarding internal control over financial reporting requirements for management and auditors have had a profound effect on both public companies and public accounting firms. While SOX has resulted in the public disclosure of numerous internal control deficiencies, the cost of compliance has also been widely questioned.

Attempts to better understand the law's overall effect have resulted in copious amounts of research. Glass Lewis & Co found that 1,118 US companies and 90 foreign companies filed a total of 1,342 material weakness disclosures in 2006.

Restatements for accounting errors occur when material errors existing in financial statements are not detected by either internal controls or external auditors prior to the issuance of the financial statements. The "Market Reactions to Internal Control Weakness Disclosures" study found that some characteristics of internal control weaknesses -- their severity, management's conclusion regarding the effectiveness of controls, their auditability, and the specificity of disclosures -- are informative.

Current Research Questions on Internal Control over Financial Reporting Under Sarbanes-Oxley

Labels: CPA Journal, disclosure, Glass Lewis and Co, internal control, Jian Zhang, KPMG, Kurt Pany, material weakness, research questions, Sarbanes-Oxley

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