What is it about?
This study investigates whether CEOs’ and CFOs’ voluntary certification of internal controls over financial reporting (ICFR) is value relevant.
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Why is it important?
The primary motivation for this study is that there is little evidence on ICFR reporting regimes that are different from the U.S. Most prior studies in a mandatory environment are conducted in the U.S. post-SOX. Since the passage of SOX in 2002, costs of compliance have been at the heart of the U.S. debate, especially regarding the alleged disproportionate costs of audit on smaller publicly listed firms (Krishnan et al., 2008), requiring opportunity for less costly reporting of ICFR. Fortune 1000 firms spent an average of US$5.9m to comply with the internal control reporting requirements in their first year of SOX Section 404 compliance (Hammersley et al., 2008). In Australia, a large proportion of listed firms are small in size, with more than 50% that are loss-making.2 For such firms, costly ICFR audit similar to SOX Section 404 is not an economically viable option. Given the huge cost imposed by SOX (Krishnan et al., 2008), an alternative ICFR reporting regime is important for firms.
Perspectives
The study uses information asymmetry to explain how the information environment affects the way market values voluntary ICFR certification disclosures. Prior studies find conflicting evidence on the cost of equity implication of ICDs disclosures in the U.S. SOX setting (e.g. Ogneva et al., 2007; Beneish et al., 2008; Ashbaugh-Skaife et al., 2009). For example, Beneish et al. (2008) find that SOX Section 302 disclosures are informative but find no evidence for SOX Section 404 disclosures. This study explains that the positive association between share price and financial information of ICFR certification firms is more pronounced for firms operating within a weak information environment. The study has implications for investors, regulators, auditors and management of listed firms as it informs them about the Australian voluntary ICFR reporting regime as an alternative to the SOX Section 404 in the U.S.
Mukesh Garg
Monash University
Read the Original
This page is a summary of: Value relevance of voluntary internal control certification: An information asymmetry perspective, Australian Journal of Management, August 2017, SAGE Publications,
DOI: 10.1177/0312896217691079.
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