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.doc

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 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 committees, 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 contributes 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: 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 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 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 10¬K reports (SEC 2003a) An accelerated 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 private 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 manner1 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 reporting, 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 financial 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 his 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 the 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 that 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 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 incentives 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. Effective 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 remediation 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 combination 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 ability 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 the 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 publicly 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. Hence, 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 conclusion 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 identified 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. 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 effectiveness 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 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, the 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 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-specific 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 internal 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 pressure 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 likely 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 mechanisms 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 necessary 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 contributes 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 suggest 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 tighten 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 of 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 audit 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 that 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 this 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 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 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 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 requirements 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 recommendations 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 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 fin