Researchers at the Sam M. Walton College of Business at the University of Arkansas presented their study at the annual meeting of the American Accounting Association that indicates audit firms’ reputations suffer when they disclose weakness in corporate clients’ accounting.
Stephen Rowe, assistant professor in the Department of Accounting, and Elizabeth Cowle, a Walton College Ph.D. student in accounting, presented “Don’t Make Me Look Bad: How the Audit Market Penalizes Auditors for Doing Their Job” during the association’s annual meeting in San Francisco.
Rowe and Cowle wrote: “The issuance of an ICMW (a flag indicating material weaknesses in companies’ internal controls) should neither impair the issuing auditor’s reputation, nor deter clients from selecting auditors with a history of issuing ICMWs.” Yet, “auditors who issue an ICMW are perceived as less attractive in the audit market,” which therefore “disincentivizes auditors from disclosing internal-control information that could make their clients look bad.”
At Walton College, Rowe teaches intermediate accounting and does research in auditing. He has a Ph.D. from the University of Illinois at Urbana-Champaign, a master’s degree from Loyola University Chicago and a bachelor’s degree from Covenant College.
Flagging material weaknesses in companies’ internal controls over financial reporting is a responsibility mandated by the Sarbanes-Oxley act of 2002. “Sarbanes-Oxley represented the principal legislative response to a severe crisis not only for the accounting profession but for the free-market system,” Rowe said. “While some studies have found SOX to be of value, the issue, as this study suggests, is far from settled. To anyone who believes in the free-market system, this needs to be concerning.”
The paper was among hundreds of scholarly studies presented at the association’s annual meeting, which attracted some 4,000 scholars and practitioners to San Francisco on Aug. 9-14. The AAA is a worldwide organization devoted to excellence in accounting education, research, and practice.
Their study also was written about in the Wall Street Journal.