The Effects of Internal Controls on the Audit Completeness and Reliability of Earnings Announcements

We examine how internal control effectiveness influences the audit completeness of earnings announcements and the consequences on earnings reliability. One of the intentions of the Sarbanes-Oxley Act of 2002 (SOX) was for internal controls to improve financial reporting. Although we show that effect...

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Bibliographic Details
Published in:Accounting horizons 2023-12, Vol.37 (4), p.9-32
Main Authors: Draeger, Michelle A., Lohwasser, Eric R.
Format: Article
Language:English
Subjects:
Announcements
Audits
Disclosure
Earnings
Financial disclosure
Financial reporting
Internal controls
Policy making
Reliability
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Summary:We examine how internal control effectiveness influences the audit completeness of earnings announcements and the consequences on earnings reliability. One of the intentions of the Sarbanes-Oxley Act of 2002 (SOX) was for internal controls to improve financial reporting. Although we show that effective internal controls directly reduce earnings announcement revisions as SOX would intend, we also find evidence that it provides management with the confidence to release their earnings disclosure earlier (with a less complete audit), indirectly increasing the likelihood of earnings announcement revisions. As a result, the beneficial impact of internal control effectiveness on earnings reliability is significantly undermined in a regulatory environment where companies are permitted to disclose preliminary earnings to the public. Our study provides important insights for regulatory policymaking and for accounting practitioners who are responsible for producing reliable financial disclosure. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.
ISSN:0888-7993
1558-7975
DOI:10.2308/HORIZONS-2021-097