（2007）Determinants of weaknesses in internal control over financial reporting.pdfVIP

ARTICLE IN PRESS Journal of Accounting and Economics 44 (2007) 193–223 /locate/jae Determinants of weaknesses in internal control over financial reporting $ a b c, Jeffrey Doyle , Weili Ge , Sarah McVay a College of Business, Utah State University, 3500 Old Main Hill, Logan, UT 84322, USA b University of Washington Business School, University of Washington, Mackenzie Hall, Box 353200, Seattle, WA 98195, USA cStern School of Business, New York University, 44 West Fourth Street, Suite 10– 94, New York, NY 10012, USA Received 2 March 2005; received in revised form 15 May 2006; accepted 26 October 2006 Available online 26 December 2006 Abstract We examine determinants of weaknesses in internal control for 779 firms disclosing material weaknesses from August 2002 to 2005. We find that these firms tend to be smaller, younger, financially weaker, more complex, growing rapidly, or undergoing restructuring. Firms with more serious entity-wide control problems are smaller, younger and weaker financially, while firms with less severe, account-specific problems are healthy financially but have complex, diversified, and rapidly changing operations. Finally, we find that the determinants also vary based on the specific reason for the material weakness, consistent with each firm facing their own unique set of internal control challenges. r 2006 Elsevier B.V. All rights reserved. JEL Classification: M41 Keywords: Internal control; Material weakness; Sarbanes-Oxley $ We would like to thank Eli Bar