Determinants and consequences of noncompliance with the 2013 COSO framework |
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| Institution: | 1. College of Business & Public Management, Wenzhou-Kean University, Wenzhou, Zhejiang, China;2. School of Economics and Business, SUNY Oneonta, Oneonta, NY 13820, United States;3. BYU Marriott School of Business, Brigham Young University, Provo, UT 84602, United States;4. Shidler College of Business University of Hawaii at Manoa, Honolulu, HI 96822, United States;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. Hong Kong University of Science and Technology, Hong Kong, China;2. Institute of Accounting and Finance, Shanghai University of Finance and Economics, China;3. Guanghua School of Management, Peking University, China;4. SILC Business School, Shanghai University, China;1. Oregon State University, United States;2. Purdue University, United States;1. College of Business, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong;2. School of Business, Hong Kong Baptist University, 34 Renfrew Road, Kowloon, Hong Kong;3. Faculty of Business, Lingnan University, 8 Castle Peak Road, Tuen Mun, Hong Kong;1. Bundeswehr University Munich, Germany;2. LMU Munich School of Management, Germany;1. School of Business, University of North Carolina at Pembroke, 1 University Drive, PO Box 1510, Pembroke, NC 28372, USA;2. University of Missouri – St. Louis, 210 Anheuser-Busch Hall, 1 University Blvd., St. Louis, MO 63121, USA |
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| Abstract: | The Securities and Exchange Commission (SEC) requires firms to use a “suitable framework” as a basis for evaluating the effectiveness of internal control over financial reporting. The COSO 1992 framework was the most commonly used suitable framework until it was superseded by the COSO 2013 framework. Because strict compliance with the updated framework was not enforced by regulatory authorities, a nontrivial number of firms did not comply in a timely fashion. We investigate determinants and consequences of noncompliance with the COSO 2013 framework following the supersession of the COSO 1992 framework. We find that noncompliance is positively associated with proxies for resource constraints, financial distress, and a weak internal control environment, and negatively associated with auditor industry specialization, board size, and audit committee accounting expertise. Further tests suggest that following supersession of the 1992 framework, investors view quarterly earnings surprises of the noncompliant firms to be less credible and that noncompliance increases regulatory scrutiny. Finally, we find some evidence that accounting conservatism increases after supersession of the 1992 framework for compliant firms relative to noncompliant firms, suggesting that noncompliance can delay the potential benefits of implementing the updated framework. |
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| Keywords: | COSO 2013 internal control framework Noncompliance Internal controls Investor perceptions Regulatory scrutiny Accounting conservatism |
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