Internal Controls and Financial Reporting Credibility – Recent International Developments

Author:Mirela DOBRE, Ph. D. Student; Professor Allan HODGSON, Ph. D.



Keywords:deficiencies, material weaknesses, Sarbanes Oxley Act, credibility, financial reporting

This paper summarizes some of the most recent research concerning the association between internal controls efficiency and the credibility of annual reports published by listed companies. According to prior literature, adequate internal controls are an indicator for high quality reporting and increased firm efficiency and value. This might be interesting for a professional auditor from several points of view: it can affect the complexity and extent of procedures during the audit process or it can influence audit fees for assurance or other services. Furthermore, this paper could be useful to those who appreciate developments in corporate governance best practices from large American companies. These are subject to regulation that sets the tone for reporting credibility worldwide and represents the starting point or inspiration for new laws and frameworks that are increasingly efficient. The first part investigates how financial reporting quality can be affected by internal control deficiencies. Chapter 2 includes a review of the latest empirical deficiencies disclosure literature and Chapter 3 analyses the related worldwide regulation. The conclusion is that requiring companies to disclose information about their internal control weaknesses, especially those related to financial reporting is a welcome improvement, as long as the costs of compliance do not outweigh the benefits. The challenge for the Romanian audit profession is to undertake audits and provide advice that will increase audit quality and improve efficiency – moreover to do so in a manner that convinces firms of the greater benefits from increased costs.\r\n