Are Companies Punishing Their Auditors for Flagging Their Material Weaknesses?
As reflected in an article by MarketWatch’s Francine McKenna, this new study about internal controls reporting by independent auditors is getting a lot of press. Here’s the intro from the “Accounting Today” article:
Auditing firms that tend to find material weaknesses in companies’ internal controls are seen as less attractive in the audit market, according to a new study. The study, by Stephen P. Rowe and Elizabeth N. Cowle of the University of Arkansas, looked at 13 years of data from 885 local offices of 358 audit firms in the U.S., and found offices that reported material weaknesses in internal controls over financial reporting for one or more clients in the course of a year saw their average fee total in the following year grow by about 8 percent less than would have been the case had they issued none. That decline was in addition to lost fees from clients who were found to have internal control material weaknesses, or ICMWs, and responded by switching auditors, which was something that companies tagged with ICMWs were often found to do by the researchers.
And here’s the intro from a CFO.com article:
“Don’t Make Me Look Bad: How the Audit Market Penalizes Auditors for Doing Their Job.” That’s the title of a study being presented at this week’s annual meeting of the American Accounting Association. While it may not portray companies in the most favorable light, at the same time it’s merely the latest suggestion that auditors might not necessarily lean toward rendering unbiased opinions on paying clients.
“Presumably, audits that provide useful information to users of financial statements should serve to increase the credibility of financial statements and, in turn, increase auditor reputation,” the study’s authors write. But the research found exactly the opposite, at least with respect to one essential service auditors are required to perform: flagging material weaknesses in companies’ internal controls over financial reporting, a responsibility mandated by the Sarbanes-Oxley Act (SOX).
-Broc Romanek, TheCorporateCounsel.net August 19, 2019
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