Hermanson Ye Audit MYC Paper 96

Factors Associated with Providing Early Warning of Material Weaknesses 1in Internal Control Under SOX Section 302 aDana R. Hermanson & bZhongxia (Shelly) Ye December 10, 2007 1 We appreciate very helpful suggestions from Holly Ashbaugh-Skaife, Joe Carcello, Marcus Caylor, Audrey Gramling, Roger Hermanson, and Jagan Krishnan, as well as the research assistance of Ana Lakshmanan and Ellen Roberts. a (Corresponding author) Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144-5591. Phone: 770.423.6077, Fax: 770.499.3420, dhermans@kennesaw.edu. b Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144-5591. Phone: 678-797-2395, Fax: 770.499.3420, zye@kennesaw.edu. Factors Associated with Providing Early Warning of Material Weaknesses in Internal Control Under SOX Section 302 Abstract We examine factors associated with whether any of the internal control deficiencies (ICDs) disclosed in adverse initial Section 404 reports were disclosed earlier by management under Section 302. Based on 451 companies with adverse initial Section 404 reports, we find evidence that early disclosure of ICDs under Section 302 is associated with factors reflecting management’s incentive to discover and disclose ICDs (Ashbaugh-Skaife et al., 2007a): the severity and number of material weaknesses, prior earnings restatements, future equity ...