This paper examines remediation of Sarbanes-Oxley Section 404 internal control deficiencies (ICDs) at all levels of severity, before the balance sheet date. While a number of studies investigate remediation of publicly disclosed material weaknesses (MWs), the activity we study takes place out of public view and occurs among companies with both clean and adverse Section 404 opinions. Using data provided by multiple auditing firms, we find that about one-fourth of detected ICDs are remediated before year-end, leaving many uncorrected. We model remediation activity with direct measures of company and auditor Section 404 processes not available to prior research. Model results show that companies' effective information technology integration and early start to control testing are positively associated with remediation. In contrast, remediation is negatively associated with discovery by auditors, discovery by substantive tests, and related financial misstatements. Following prior research on MWs, we also observe that ICD remediation is less likely for smaller companies with greater financial risk, and for certain entity-level control problems.

You do not currently have access to this content.