Board Independence and Internal Control Weakness: Evidence from SOX 404 Disclosures

Yangyang Chen, Robert Knechel, Vijaya Bhaskar Marisetty, Cameron Truong, Madhu Veeraraghavan

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In this paper, we investigate whether board independence has an impact on the likelihood that a company reports weaknesses in internal controls. Using a sample of 11,226 firm-year observations spanning the period 2004-2012, we establish several findings. First, we document a negative relation between board independence and the disclosure of internal control weaknesses. We also document that the negative relation is stronger for firms with unitary leadership (combined positions of CEO and chairman) than for firms with dual leadership. Next, we show that board independence is associated with both fewer account-specific and company-level weaknesses. Finally, we show that board independence is associated with timely remediation of internal control weaknesses and that the implementation of Auditing Standard No. 5 in 2007 weakens the effect of board independence on the disclosure of ICW.

Original languageEnglish
Pages (from-to)45-62
Number of pages18
JournalAuditing-a Journal of Practice & Theory
Volume36
Issue number2
DOIs
Publication statusPublished - May 2017

JEL classifications

  • g10 - General Financial Markets: General (includes Measurement and Data)
  • g18 - General Financial Markets: Government Policy and Regulation

Keywords

  • internal control weakness
  • board independence
  • unitary versus dual leadership
  • SOX 404
  • CORPORATE GOVERNANCE
  • CONTROL DEFICIENCIES
  • EMPIRICAL-ANALYSIS
  • FIRM PERFORMANCE
  • AUDIT COMMITTEE
  • REMEDIATION
  • DIRECTORS
  • QUALITY
  • MANAGEMENT
  • FRAUD

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