We examine how internal control effectiveness influences the audit completeness of earnings announcements and the consequences on earnings reliability. One of the intentions of the Sarbanes Oxley Act of 2002 (SOX) was for internal controls to improve financial reporting. While we show that effective internal controls directly reduce earnings announcement revisions as SOX would intend, we also find evidence that it provides management with the confidence to release their earnings disclosure earlier (with a less complete audit), indirectly increasing the likelihood of earnings announcement revisions. As a result, the beneficial impact of internal control effectiveness on earnings reliability is significantly undermined in a regulatory environment where companies are permitted to disclose preliminary earnings to the public. Our study provides important insights for regulatory policymaking and for accounting practitioners who are responsible for producing reliable financial disclosure.
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Research Article|
September 19 2022
The Effects of Internal Controls on the Audit Completeness and Reliability of Earnings Announcements
Michelle Draeger
;
Michelle Draeger
UNITED STATES
Colorado State University
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Eric Lohwasser
Eric Lohwasser
Colorado State University
Accounting
255 Rockwell Hall
1201 Campus Delivery
UNITED STATES
Fort Collins
CO
80523
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Received:
July 02 2021
Revision Received:
May 20 2022
Revision Received:
June 02 2022
Revision Received:
September 09 2022
Accepted:
September 15 2022
Online Issn: 1558-7975
Print Issn: 0888-7993
2022
Accounting Horizons (2022)
Citation
Michelle Draeger, Eric Lohwasser; The Effects of Internal Controls on the Audit Completeness and Reliability of Earnings Announcements. Accounting Horizons 2022; https://doi.org/10.2308/HORIZONS-2021-097
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