Publication Type

Working Paper

Publication Date

1-2017

Abstract

We examine whether effective internal control over financial reporting has implications beyond that of financial reporting to firm operational efficiency. We predict and find that operational efficiency, derived from frontier analysis, is significantly lower among firms disclosing material weaknesses in internal control relative to firms with effective control. This result exists even in the years leading up to the disclosure of material weaknesses, but disappears after remediation of the internal control problems, suggesting that the remediation of material weaknesses improves operational efficiency. Overall, our study extends the literature on the reporting effects of strong versus weak internal control, and helps inform the debate over the costs versus benefits of the internal control reporting requirements under the Sarbanes-Oxley Act of 2002.

Keywords

Internal control, operational efficiency, Sarbanes-Oxley Act

Discipline

Accounting | Corporate Finance

Research Areas

Financial Performance Analysis

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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