An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kam C. Chan
Pace University

Barbara R. Farrell
Pace University

Picheng Lee
Pace University

Abstract: The main objectives of the Sarbanes-Oxley Act of 2002 are to improve the accuracy and reliability of corporate disclosure. Under Section 404 of the Sarbanes-Oxley Act, the external auditor has to report its assessment of the firm’s internal controls and attest to management’s assessment of the firm’s internal controls. Material weaknesses in internal controls must be disclosed in the auditor and management reports. The objectives of this study are to examine if firms reporting material internal control weaknesses under Section 404 have more earnings management and lower return-earnings associations compared to other firms. The results provide mild evidence that there are more positive and absolute discretionary accruals for firms reporting material internal control weaknesses than for other firms. The findings also provide mild evidence that firms reporting material internal control weaknesses have lower return-earnings associations than other firms.

Back to Session Listing

AAA Home Page