Are voluntary internal controls-related audit report disclosures informative in IPOs?

Initial public offering (IPO) companies are exempt from Section 404 of the Sarbanes-Oxley Act of 2002, leaving investors to assess the quality of an IPO company’s internal controls, which affect the quality of management-provided financial information, without an opinion on internal controls effectiveness from management or the external auditor. When not engaged to opine on the effectiveness of internal controls, auditing standards permit auditors to voluntarily state that their opinion does not extend to internal control effectiveness. Given auditors’ limited ability to distinguish financial reporting quality in the unqualified audit report, the costly nature of audit report modifications, and auditors’ litigation risk concerns, these voluntarily audit report disclosures are likely informative as to the quality of internal controls. Using a sample of IPOs completed on United States equity exchanges from 2005 through 2014, I predict and find that the above-mentioned voluntary internal controls-related audit report disclosure is associated with a higher likelihood of post-IPO auditor-reported internal control deficiencies, lower IPO offer prices, lower post-IPO earnings, and increased post-IPO returns-based risk. These associations are robust to addressing the endogenous nature of the auditor’s disclosure decision. Overall, my results suggest that auditor voluntary disclosures are informative. This research should be of interest to investors, regulators tasked with reforming the audit reporting model, and legislators who recently passed Title I of the Jumpstart Our Business Startups Act that exempts qualifying IPO companies from Section 404(b) reporting requirements for up to five years.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Accountancy

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Czerney, Keith R

Contributors dc:contributor

• Thompson, Anne M
• Sougiannis, Theodore
• Urcan, Oktay
• Chan, Louis

• audit reports
• internal controls
• initial public offerings
• voluntary disclosure

Statement dc:rights

• Copyright 2015 Keith Czerney

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/78614

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/78614