Mandatory Management Disclosure And Mandatory Independent Audit Of Internal Controls: Evidence Of Configural Information Processing By Investors

Keywords

Configural information processing; Internal controls over financial reporting; Mandatory independent audit; Mandatory management disclosure

Abstract

We conduct an experiment where alumni participants from a Canadian accounting and finance undergraduate program assume they are in one of four regulatory regimes (manipulated between-subjects) and make investment potential evaluations for two firms (manipulated within-subjects): a firm disclosing no material weaknesses (No-MW disclosure firm) and a firm disclosing material weaknesses (MW disclosure firm) in internal controls over financial reporting (ICFR). We find evidence of configural information processing. For the No-MW disclosure firm, mandatory (versus voluntary) disclosure of ICFR material weaknesses and mandatory (versus voluntary) independent ICFR audit are substitutes in enhancing investment potential evaluations. However, for the MW disclosure firm, neither mandatory disclosure nor mandatory audit has any effect on investment potential evaluations. Supplementary experiments with undergraduate participants suggest that the pattern of configural information processing is a function of participants' knowledge of company disclosure incentives and the assurance value of an audit, wherein undergraduates with lower levels of knowledge are less able to perceive the effects of mandatory disclosure and mandatory audit on investment potential evaluations. Our findings have implications for regulators who are concerned about balancing the costs and benefits of different regulatory mechanisms.

Publication Date

1-1-2017

Publication Title

Accounting, Organizations and Society

Volume

56

Number of Pages

1-20

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.aos.2016.12.002

Socpus ID

85006753339 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85006753339

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