Investor Demand for Internal Control Audits of Large U.S. Companies: Evidence from a Regulatory Exemption for M&A Transactions

Posted: 5 Feb 2018

See all articles by Robert Carnes

Robert Carnes

University of Florida - Fisher School of Accounting

Dane M. Christensen

University of Oregon

Phillip T. Lamoreaux

Arizona State University

Date Written: January 22, 2018

Abstract

Because internal control audits never existed before the passage of the Sarbanes-Oxley Act (SOX), and these audits became mandatory for all U.S. accelerated filer companies at the same time, it has been difficult to assess the extent of investor demand for these audits. To understand whether investors demand internal control audits for these large companies, we exploit a regulatory exemption that permits companies to exclude acquired operations from an internal control audit. Using this voluntary setting, we find that investors react negatively if a company excludes acquired operations from their internal control audit. This negative reaction is larger when more of the company’s operations are excluded from audit and when there is greater information uncertainty. Further, companies that exclude acquired operations from internal control audits are more likely to have a subsequent restatement. Collectively, these findings are consistent with investors perceiving value in (i.e., demanding) internal control audits for large U.S. public companies.

Keywords: Internal Control, Audit, Sarbanes-Oxley, Political Economy

JEL Classification: M41, M42

Suggested Citation

Carnes, Robert and Christensen, Dane M. and Lamoreaux, Phillip T., Investor Demand for Internal Control Audits of Large U.S. Companies: Evidence from a Regulatory Exemption for M&A Transactions (January 22, 2018). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3111469

Robert Carnes

University of Florida - Fisher School of Accounting ( email )

PO Box 117166
Gainesville, FL 32611-7166
United States

Dane M. Christensen

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Phillip T. Lamoreaux (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,664
PlumX Metrics