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 (FSs) 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. Furthermore, when clients with separate reports receive new MWOs, the reports are more likely to be distant than in the preceding year’s (non-MWO) filing. 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.
| Speaker: | Dr Linda Myers Haslam Chair of Business and Distinguished Professor of Accounting, University of Tennessee-Knoxville |
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