TY - JOUR
T1 - Investor perceptions of an auditor's adverse internal control opinion
AU - Lopez, Thomas J.
AU - Vandervelde, Scott D.
AU - Wu, Yi Jing
PY - 2009/5
Y1 - 2009/5
N2 - In response to recent corporate scandals, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) which, among other things, requires that the auditor render an opinion as to the effectiveness of a company's system of internal controls. The assumption implicit in this requirement is that the new internal control opinion provides investors with value-relevant information. Our evidence suggests that an adverse audit opinion on internal control over financial reporting provides incremental value-relevant information to investors beyond that contained in the financial statement audit opinion alone. Specifically we find that an adverse audit opinion on internal controls over financial reporting relative to an unqualified opinion is significantly associated with investors assessing a higher risk of financial statement misstatement, higher risk of a future financial statement restatement, higher information asymmetry, lower financial statement transparency, higher risk premium, higher cost of capital, lower sustainability of earnings, and lower earnings predictability. Overall, our empirical results support our hypotheses that the auditor's opinion on the internal controls over financial reporting provides financial statement users with value-relevant information.
AB - In response to recent corporate scandals, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) which, among other things, requires that the auditor render an opinion as to the effectiveness of a company's system of internal controls. The assumption implicit in this requirement is that the new internal control opinion provides investors with value-relevant information. Our evidence suggests that an adverse audit opinion on internal control over financial reporting provides incremental value-relevant information to investors beyond that contained in the financial statement audit opinion alone. Specifically we find that an adverse audit opinion on internal controls over financial reporting relative to an unqualified opinion is significantly associated with investors assessing a higher risk of financial statement misstatement, higher risk of a future financial statement restatement, higher information asymmetry, lower financial statement transparency, higher risk premium, higher cost of capital, lower sustainability of earnings, and lower earnings predictability. Overall, our empirical results support our hypotheses that the auditor's opinion on the internal controls over financial reporting provides financial statement users with value-relevant information.
KW - Audit opinions
KW - Internal control reporting
KW - Mediation analysis
KW - Perceived earnings quality
KW - Sarbanes-Oxley
UR - http://www.scopus.com/inward/record.url?scp=67349120339&partnerID=8YFLogxK
U2 - 10.1016/j.jaccpubpol.2009.04.003
DO - 10.1016/j.jaccpubpol.2009.04.003
M3 - Article
AN - SCOPUS:67349120339
SN - 0278-4254
VL - 28
SP - 231
EP - 250
JO - Journal of Accounting and Public Policy
JF - Journal of Accounting and Public Policy
IS - 3
ER -