THESIS
2011
vii, 73 p. ; 30 cm
Abstract
Essay I: Auditors' Response to Initiation of Compensation Clawback Provisions
While firm-initiated compensation recovery (or clawback) provisions are gaining popularity, little
is known about their impact on information intermediaries such as auditors. This study shows that
auditors view such provisions as useful in reducing audit risk. Specifically, I find that auditors are
less likely to report material internal control weaknesses after the firm adopts clawback
provisions. In addition, auditors charge those firms lower audit fees and are able to issue audit
reports sooner after the adoption. These results imply that auditors consider clawback provisions
helpful in enhancing the integrity of financial reporting and thus reduce audit effort.
Essay II: Internal Control Weakness...[
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Essay I: Auditors' Response to Initiation of Compensation Clawback Provisions
While firm-initiated compensation recovery (or clawback) provisions are gaining popularity, little
is known about their impact on information intermediaries such as auditors. This study shows that
auditors view such provisions as useful in reducing audit risk. Specifically, I find that auditors are
less likely to report material internal control weaknesses after the firm adopts clawback
provisions. In addition, auditors charge those firms lower audit fees and are able to issue audit
reports sooner after the adoption. These results imply that auditors consider clawback provisions
helpful in enhancing the integrity of financial reporting and thus reduce audit effort.
Essay II: Internal Control Weaknesses and Investors' Assessment of Earnings Quality
This study examines if the mandated disclosure of firms' internal control quality affects the
market's assessment of earnings quality. I find that the earnings response coefficient (ERC)
declines after the first disclosure of internal control weaknesses (ICWs) and recovers after the
weaknesses are remediated. I further show that the ICW-induced decrease in the ERC is more
pronounced when the firm discloses more weaknesses. The decrease is stronger for positive than
for negative earnings news. In addition, firms with lower ex ante likelihood of reporting ICWs
suffer more decrease in the ERC. Thus, my evidence suggests that mandated ICW disclosure is
viewed by investors as relevant in appraising earnings quality. Since internal control over
financial reporting is designed to provide reasonable assurance of the reliability of financial
reporting (PCAOB, 2004), my findings show that the ICW disclosure is viewed by the market to
at least partially achieve PCAOB's intended objective.
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