[Research Seminar] ‘Do Firms Receiving Integrated Audits Seek to Strategically Obfuscate Material Weakness Opinions?’
October 10th, 2024
2:30pm – 4pm in B252 Lille Campus & on Zoom
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Speakers:
Linda Myers – University of Tennessee
ABSTRACT
Because material weakness opinions (MWOs) can have negative consequences, managers have incentives to strategically influence how the auditor reports an existing MWO in the audit report. The lack of guidance regarding whether auditors should issue combined versus separate reports for integrated audits of internal control over financial reporting (ICFR) and financial statements suggests that these decisions are perceived as trivial. We find that auditors are significantly more likely to change from issuing combined to separate reports when clients receive new material weakness opinions (MWOs). Cross-sectional tests suggest that client incentives and opportunities to influence the report format could play a role in this decision. We also find that Big 4 auditor decisions to combine audit reports in MWO years signal elevated misstatement risk, and
when clients with separate reports receive new MWOs, managers place the
reports farther apart in the 10-K than in the preceding (non-MWO) year.
Collectively, these results suggest that the auditor’s decision about reporting
format in light of a MWO can have potentially important consequences for the
transparency of ICFR reporting.