Internal Control Weakness, Remediation Failure, and Audit Opinions: Evidence from the US Listed Firms

Abstract

<p>This study investigates the impact of internal control weakness and failure of remediation on audit opinions in the US-listed firms under the Sarbanes-Oxley Act (SOX) Section 404. The analysis is based on the US nonfinancial listed firms for the period 2010-2018. The data were analysed using logit regressions and a propensity score matching method. The results of this study document that firms with internal control weaknesses disclosed are more likely to be issued modified audit opinions. Similarly, last year's modified audit opinion or going-concern opinion also contributes to receiving modified audit opinion in the current year. Furthermore, firms that failed to remediate the previous year's internal control weakness are more exposed to getting a modified audit opinion. However, there is no evidence that suggests successful remediation of the prior year's internal control weakness contributes to reducing the likelihood of receiving a modified audit opinion in the current year. The finding of this study is important as the negative impact of internal control weaknesses and unremedied weaknesses are of interest to firms, regulators, auditors, and users of financial statements in making informed risk management and investment decisions.</p>