The effectiveness of the auditor’s opinion on the internal controls over financial reporting
Bibliographic record
Abstract
Purpose Recent studies have concluded that auditors underreport existing internal control over financial reporting (ICFR) weaknesses. This study aims to assess how effective external auditors are, as independent third parties, at disclosing reliable opinions to the public on the ICFR. Design/methodology/approach Using a logistic regression, the authors analyzed a sample of 106 US companies classified as large accelerated filers or accelerated filers consisting in 53 companies which restated their financial statements and a control group of 53 companies having “clean financial statements” at any given moment during the research period, between 2005 and 2018. Findings The results indicate that only 34% of companies with financial statements deemed unreliable have received an adverse ICFR opinion issued by the external auditor during the misrepresentation period or its prior year. The authors also notice that external auditors are somewhat effective in identifying and disclosing red flags to the public that certain companies have internal control (IC) material weaknesses. The results also indicate that the average presence of an adverse IC opinion issued by the external auditor during the misrepresentation period or its prior year for companies with unreliable financial statements is higher than for companies with financial statements deemed reliable. Practical implications This study tests if an increase in efforts and disbursements with audit fees are justifiable by external auditors’ issuing effective, reliable opinions and reinforcing a more transparent and ethical capital markets environment, that is, an environment where accurate information is available for stakeholders. If external auditors are negligent in providing a qualitative and independent opinion to stakeholders, the increase of disbursements made with audit fees is less justifiable. Thus, the research has practical implication for auditors as well as standard setters. Originality/value This study extends the literature on ICFR by empirically testing whether the public can rely on external auditors’ opinions expressed on Sarbanes–Oxley Section 404 reports.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.057 | 0.293 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.001 |
| Bibliometrics | 0.003 | 0.002 |
| Science and technology studies | 0.001 | 0.003 |
| Scholarly communication | 0.004 | 0.003 |
| Open science | 0.001 | 0.003 |
| Research integrity | 0.001 | 0.001 |
| Insufficient payload (model declined to judge) | 0.002 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".