Document Type

Dissertation

Degree

Doctor of Philosophy

Department

Accounting

Advisor's Name

Kannan Raghunandan

Advisor's Title

Committee Chair

Advisor's Name

Dasaratha Rama

Advisor's Name

Abhijit Barua

Advisor's Name

Suchismita Mishra

Keywords

Internal Control, Audit Fees, Non Accelerated Filers, Section 302, Section 404, Early Warnings, Audit Report Lag

Date of Defense

6-14-2011

Abstract

I examine three issues related to internal control reporting by non-accelerated filers. Motivation for the three studies comes from the fact that Section 404 of the Sarbanes-Oxley Act (SOX) continues to be controversial, as evidenced by the permanent exemption from Section 404(b) of SOX granted to non-accelerated filers by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act also requires the SEC to study compliance costs associated with smaller accelerated filers.

In the first part of my dissertation, I document that the audit fee premium for non-accelerated filers disclosing a material weakness in internal controls (a) is significantly lower than the corresponding premium for accelerated filers, and (b) declines significantly over time. I also find that in the case of accelerated filers remediating clients pay lower fees compared to clients continuing to report internal control problems; however, such differences are not observed in the case of non-accelerated filers.

The second essay focuses on audit report lag. The results indicate that presence of material weaknesses are associated with increased audit report lags, for both accelerated and non-accelerated filers. The results also indicate that the decline in report lag following remediation of problems is greater for accelerated filers than for non-accelerated filers.

The third essay examines early warnings (pursuant to Section 302 disclosures) for firms that subsequently disclosed internal control problems in their 404 reports. The analyses indicate that non-accelerated firms with shorter CFO tenure, presence of accounting experts on the audit committee, and more frequent audit committee meetings are more likely to provide prior Section 302 warnings.

Overall the results suggest that there are differences in internal control reporting between the accelerated and non-accelerated filers. The results provide empirical grounding for the ongoing debate about internal control reporting by non-accelerated filers.

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