Fatima Alali

The effect of IT controls on financial reporting

Purpose - The purpose of this paper is to examine information technology (IT) control deficiencies and their affect on financial reporting. Design/methodology/approach - This study examines 278 companies reporting IT control deficiencies in the first three years of the SOX 404 requirements (2004-2006). Using quantitative analysis, the study evaluates the impact of IT deficiencies on financial reporting and determines significant differences between companies that report IT deficiencies and companies that do not report IT deficiencies. Findings - Four accounting errors: revenue recognition issues; receivables, investments and cash issues; inventory, vendor and cost of sales issues; and financial statement, footnote, US GAAP, and segment disclosures issues stand out as common financial reporting problems in companies reporting weak IT controls. This study also suggests that companies with IT control deficiencies report more internal control (IC) deficiencies, are smaller, pay higher audit fees, and are typically audited by smaller accounting firms. Research limitations/implications - This research is limited in scope since only SOX accelerated filers are included in the analysis. As of this study, smaller, non-accelerated filers are not required to report IC control weaknesses under SOX. Originality/value - As of this research, no analysis exists to support or refute the relationship of IT controls and accounting errors. This study re-affirms the widespread impact that deficient IT controls can have on the overall IC structure of the business. Our study reveals some of the important issues associated with IT in the financial reporting process. The role of IT in financial reporting systems is destined to escalate. Studies, like ours, can help managers and auditors identify IT problems that affect financial reporting and take remedial steps to correct these weaknesses.

The effect of corporate governance on firm’s credit ratings: further evidence using governance score in the United States

We investigate whether corporate governance affects firms’ credit ratings and whether improvement in corporate governance standards is associated with improvement in investment grade rating. We use the Gov‐score of Brown and Caylor (2006), the Gomper’s G index and an entrenchment score of Bebchuk et al. (2009) to proxy for corporate governance. Using a sample of US firms, we find that firms characterized by stronger corporate governance have a significantly higher credit rating, and that this association is accentuated for smaller firms relative to larger firms. We find that an improvement in corporate governance is associated with improvement in bond rating.

Audit fees and discretionary accruals: compensation structure effect

Purpose - The purpose of this paper is to examine the relationship between discretionary accruals (DAs) and audit fees and whether this relationship is affected by the chief financial officers (CFO) compensation structure. Design/methodology/approach - Using a large sample of cross-sectional firms over the period 2000-2006, multiple ordinary least square regression models are estimated. Findings - The paper finds that there is a positive and significant association between DAs and audit fees. Evidence shows that this relationship is significantly higher as CFOs bonuses increase and that this relationship is moderated as CFOs salaries increase. It is also found that income-increasing DAs are positively and significantly related with audit fees and that increase in CFOs bonuses signifies this positive relationship. Research limitations/implications - Results may change during the current financial crisis (i.e. 2007-present) due to the increased regulatory scrutiny of executive compensation. Practical implications - The study has regulatory implications because of the recent calls to require a mandate regulating executive compensation practices. The results support these calls as data show that increased bonuses are associated with higher discretionary accruals and thus higher audit fees. There is also a call to limit executive compensation to fixed amounts and data support that increase in salaries moderates the positive association between discretionary accruals and audit fees. These results can also be used by independent auditors when assessing risks and thus the results have practical audit implications. Originality/value - The paper uses a large sample of public firms in years leading to the current financial crisis and contributes to the literature in executive compensation and audit practice.

Characteristics of failed U.S. commercial banks: an exploratory study

This study uses survival analysis to determine how early the indications of bank failure can be observed. We find that banks with high loan to asset and high personal loan to assets ratios are more likely to survive. Older banks and banks with high real estate and agricultural loans, loan loss allowance, loan charges off and non‐performing loans to assets ratio are more likely to fail. It is possible to predict survival functions of

Determinants of audit report lag in the banking industry: updated evidence

This study examines the determinants of audit report lag (ARL) in the banking industry. Using data from 2001–2010 and models developed from prior research for banks, the pooled sample results show that bank size measured by market capitalisation and profitability measured by return on assets are associated with shorter ARL. Extraordinary items and higher abnormal audit fees are associated with longer ARL. We find that these results are driven by large banks that are subject to internal control requirements under the Federal Deposit Insurance Corporation Improvement Act and Sarbanes-Oxley Act. We find that the audit of internal controls over financial reporting and the presence of material weaknesses in internal controls are associated with longer ARL in the large bank subsample. The study provides updated evidence on the determinants of audit report lag in the banking industry and finds that the determinants of ARL have changed over a period of regulatory and economic changes in the last decade.