Business strategy, internal control over financial reporting, and audit reporting quality

Kathleen A. Bentley-Goode, Nathan J. Newton, Anne M. Thompson

Research output: Contribution to journalArticlepeer-review

Abstract

This study examines whether a company’s business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and auditors’ internal control reporting quality. Organizational theory suggests that companies following an innovative ‘‘prospector’’ strategy are likely to have weaker internal controls than companies following an efficient ‘‘defender’’ strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors’ internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies’ internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients.

Original languageEnglish (US)
Pages (from-to)49-69
Number of pages21
JournalAuditing
Volume36
Issue number4
DOIs
StatePublished - Nov 2017

Keywords

  • Audit quality
  • Business strategy
  • Internal control
  • Material weakness

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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