Does the Format of Internal Control Disclosures Matter? An Experimental Investigation of Nonprofessional Investor Behavior

What is it about?

Prior research on internal control weakness (ICW) reporting reveals a lack of structure and variation in reporting formats. Using AS No. 5 and analysis of ICW reports, we conduct an experiment to examine whether two common formatting practices matter to nonprofessional investors: ICW presentation salience (bullets vs. in-text) and ICW aggregation level (whether the ICW arises from a single material weakness or combination of immaterial control deficiencies). We find that investors respond less negatively to ICW disclosures when they are presented in bulleted format and that this effect is stronger when the ICW is a combination of control deficiencies. Processing fluency and trust explain the relation between salience and investing perceptions. Our findings should be informative to management making ICW disclosures and auditors charged with reviewing them. Our paper also has implications for formatting of issues such as critical audit matters disclosed on the standard audit report.

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