Is operational control risk informative of financial reporting deficiencies?

Alastair Lawrence, Miguel Minutti-Meza, Dushyantkumar Vyas

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

This study provides evidence concerning the significance of assessing operational control risk as part of an integrative evaluation of internal controls. We examine whether operational control risk indicators can be used as cues to potential unreported financial reporting control weaknesses and financial reporting deficiencies. We use data breaches and an operational control risk index, created through textual analysis of Form 10-Ks, as our two primary indicators of operational control risk. We find positive relations between our operational control risk indicators and future financial reporting control weaknesses, restatements, SEC comment letters, and audit fees, even after controlling for contemporaneous financial reporting control weaknesses. These findings suggest that operational control risk is informative of potential financial reporting deficiencies.

Original languageEnglish (US)
Pages (from-to)139-165
Number of pages27
JournalAuditing
Volume37
Issue number1
DOIs
StatePublished - Feb 1 2018

Keywords

  • Audit fees
  • Data breaches
  • Financial reporting quality
  • Operational controls

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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