Accruals Quality and Internal Control

The effect of internal control de ficiencies on the usefulness of earnings in executive compensation ☆Kareen E.Brown a ,1,Jee-Hae Lim b ,⁎a School of Accounting and Finance,University of Waterloo,200University Ave W (HH 289D),Waterloo,ON,Canada N2L 3G1bSchool of Accounting and Finance,University of Waterloo,200University Ave W (HH 289G),Waterloo,ON,Canada N2L 3G1a b s t r a c ta r t i c l e i n f o Keywords:Sarbanes –Oxley ActInternal control material weaknesses (ICMW)Executive compensation EarningsSince SOX 404disclosures are informative about earnings,and due to the widespread practice of using earnings-based measures in executive compensation,this study examines whether reports of internal control material weaknesses (ICMW)under SOX 404in fluence firms'reliance on earnings in tying executive pay to ing 391(366)firm-year observations with reported ICMW and 3648(3138)firm-year obser-vations for CEOs (CFOs)reporting NOMW under SOX 404,we find a decreased strength in the association be-tween earnings and executives'(CEO and CFO)compensation when the firm reports an ICMW,and as the number of reported ICMW increases.In addition,we find this decreased weight on earnings for the more se-vere Company-Level than Account-Speci fic material weaknesses.Our study suggests that the ICMW report under SOX 404provides incremental information for executive compensation beyond that contained in reported earnings.©2012Elsevier Ltd.All rights reserved.1.IntroductionThe accounting scandals at firms such as Enron and WorldCom highlighted de ficiencies in corporate governance that were charac-terised by low financial reporting quality and disproportionate pay-for-performance.2To discipline firms and restore investor con fidence,legislative authorities enacted the Sarbanes –Oxley Act.Among the re-forms is Section 404of SOX (SOX 404)which requires both the manage-ment and the external auditor to report on the adequacy of a firm's internal control over financial reporting.Prior research shows that,relative to non-disclosing firms,firms reporting material weaknesses in internal control (ICMW)have inferior accruals and earnings quality (Ashbaugh-Skaife,Collins,Kinney,&LaFond,2008;Bedard,2006;Doyle,Ge,&McVay,2007b ),and lower earnings –returns coef ficients (Chan,Farrell,&Lee,2008).Given the fact that SOX 404disclosures are informative about earnings,and due to the widespread practice of using earnings-based measures in executive compensation,this studyexamines whether reports of ICMW under SOX404in fluence firms're-liance on earnings in tying executive pay to performance.A long line of research shows that earnings-based performance measures are commonly used to motivate and reward executives be-cause such measures correspond to manager actions (Gjesdal,1981).However,there are two drawbacks to using earnings to evaluate ex-ecutive performance.First,because executives know how their ac-tions impact earnings,they can manipulate this measure to increase their wealth.Second,earnings do not fully re flect the long-term im-plications of recent executive decisions.Based on these factors,firms place varying weights on earnings in compensating their exec-utives,and the weights are determined by how sensitive earnings are to effort and on the precision ,or lack of noise,with which it re-flects executives'actions (Banker &Datar,1989;Lambert &Larcker,1987).However,there is evidence that CEOs are shielded from certain negative events,such as firm restructuring (Dechow,Huson,&Sloan,1994),or above the line losses (Gaver &Gaver,1998).Our main focus of inquiry is signi ficant because it builds on this line of research by showing that the sensitivity of compensation –performance relations varies cross-sectionally with the quality of the system producing the earnings information.Weak internal controls potentially permit accounting errors to occur and go undetected,increasing unintentional errors in accrual estimation and/or facilitating intentional earnings management (Doyle et al.,2007b ).A report of an internal control de ficiency,there-fore,signals that the manager is unable to provide reasonable assur-ance regarding the quality of reported earnings (Ashbaugh-Skaife et al.,2008;Bedard,2006;Chan et al.,2008;Doyle et al.,2007b ).Using the sensitivity-precision framework,the errors introduced byAdvances in Accounting,incorporating Advances in International Accounting 28(2012)75–87☆Data availability:Data used in this paper are publicly available and also can be requested from the authors.⁎Corresponding author.Tel.:+15198884567x35702;fax:+15198887562.E-mail addresses:kebrown@uwaterloo.ca (K.E.Brown),jh2lim@uwaterloo.ca (J.-H.Lim).1Tel.:+15198884567x35776;fax:+15198887562.2For example Hall and Liebman (1998)report a 209%increase in CEO mean salary in large US firms from 1980to 1994,and Bebchuk and Grinstein (2005)document a 146%increase in CEO pay from 1993to 2003in S&P 500firms.Bebchuk and Fried (2004)ad-vance the theory that soaring executive pay is the result of managementpower.0882-6110/$–see front matter ©2012Elsevier Ltd.All rights reserved.doi:10.1016/j.adiac.2012.02.006Contents lists available at SciVerse ScienceDirectAdvances in Accounting,incorporating Advances inInternational Accountingj o u r na l h o me p a g e :ww w.e l s e v i e r.c o m /l oc a t e /a di a cweak internal controls are likely to result in earnings that capture ex-ecutives'effort with low precision,diminishing its use as an assess-ment tool for evaluating managers'performance.Motivated by the optimal contracting hypothesis,we posit thatfirms with ICMW report earnings with lower precision-sensitivity.The purpose of this study is to examine whetherfirms reporting ICMW place relatively less weight on earnings compared tofirms reporting no ICMW(NOMW).In other words,whether ICMW reports influence compensation contracts is an empirical issue because,al-though ICMWfirms report lower earnings–returns coefficients (Chan et al.,2008),prior research does not suggest any direct associ-ation between the valuation role of earnings and its usefulness in compensating executives(Bushman,Engel,&Smith,2006).Under the null hypothesis,the sensitivity of executive compensation to earnings is unaffected by internal control deficiency.Consistent with prior research,we also examine the weight placed on earnings forfirms reporting two different types of ICMW:Account-Specific and Company-Level weaknesses(Doyle,Ge,&McVay,2007a, b,Doyle et al.,2007b).Account-Specific(AS)material weaknesses arise from routinefirm operations and may be resolved by additional substantive auditing procedures.When AS material weaknesses are identified,executives or auditors can easily audit around them by per-forming additional substantive pany-Level(CL)mate-rial weaknesses,on the other hand,are less easily resolved by auditor involvement and result from lack of resources or inexperience in main-taining an effective control system.Due to the pervasiveness of CL ma-terial weaknesses,the scope of audit efforts needs to be frequently expanded to deal with these more serious concerns regarding the reli-ability offinancial statements(Moody's,2006;PCAOB2004).The extent to which auditors are able to mitigate the negative effect on earnings of these two types of weaknesses would suggest less noise/greater preci-sion in earnings from Account-Specific relative to Company-Level weaknesses.The impact of precision times sensitivity on the weight of earnings for Account-Specific pany-Level material weaknesses is therefore the second empirical question.Using391(366)firm-year observations with reported ICMW and 3648(3138)firm-year observations for CEOs(CFOs)reporting NOMW under Section404of SOX,wefind a decreased strength in the associa-tion between earnings and CEO compensation when thefirm reports an ICMW,and as the number of reported ICMW increases.Our results are also robust to controls for variousfirm characteristics that prior studies have found to influence the role of earnings in compensation contracts,including earnings quality proxies such as earnings persis-tence(Baber,Kang,&Kumar,1998)and corporate governance charac-teristics(Chhaochharia&Grinstein,2009).In addition,for CL material weaknesses,wefind evidence of a lower strength in the earnings–compensation relation for the CEOs.Wefind no such result with AS material weaknesses suggesting that only CL weaknesses affect the weight placed on earnings in compensating CEOs.This study makes two contributions.First,it contributes to existing literature by making an examination of the role of earnings as a per-formance measure in executive compensation contracts(Bushman et al.,2006;Sloan,1993;among others),and by examining how infor-mation on the quality of afirm's internal controls influences the earn-ings–compensation relation.We confirm that weak internal controls result in a diminished role for accounting measures in the CEO com-pensation relation,consistent with optimal contracting.Specifically, it is thefirms with CL weaknesses that reduce the weight on earnings in CEO cash compensation.Overall,ourfindings suggest that the in-formation in the ICMW report is incremental to,or more timely than,that provided by discretionary accruals or earnings persistence measures.Second,our study extends a growing body of literature on the rela-tion between executive compensation and ICMW in the post-SOX era. Carter,Lynch,and Zechman(2009)show that the implementation of SOX in2002led to a decrease in earnings management,and thatfirms responded by placing more weight on earnings in bonus contracts for CEOs and CFOs in the post-SOX period.Another study by Hoitash, Hoitash,and Johnstone(2009)suggests that the compensation of the CFO,who has primary responsibility for the quality of thefirm's internal controls,is penalized for reports of ICMW.Since prior evidence shows, and stresses the importance of,a performance-based compensation penalty for internal control quality as a non-financial performance mea-sure in the evaluation of executives,our study further investigates whether an ICMW impacts the weight of earnings in compensation con-tracts under the mandate of SOX404.We show thatfirms consider the strength of an earnings generation system and specifically choose to re-duce emphasis on earnings-based performance measures in determin-ing CEOs'cash compensation.The next section of this paper provides background information on the internal control disclosure practices required by the Sar-banes–Oxley Act,discusses the usefulness of earnings as a perfor-mance measure and further develops our hypotheses.The third section describes our sample and research design.The fourth section presents our descriptive statistics,results and sensitivity analyses. Thefifth section concludes the paper.2.Prior research and hypothesisSection404of SOX is one of the most visible and tangible changes tofirms'internal control systems in recent times[(Public Company Accounting Oversight Board(PCAOB)(PCAOB),2004)].3The pivotal requirement of Section404is that management assess the effective-ness of thefirm's internal controls overfinancial reporting and in-clude this information in thefirm's annualfinancial statements.This regulation increases scrutinization by thefirm's auditors because the manager assessments must then be separately attested to by the auditor.One of the benefits of the disclosures under Section404is that internal control information is now readily available and may be informative as a non-financial measure of executive performance (Hoitash et al.,2009).Numerous studies have examined the determinants and conse-quences of ICMW.Early studies document an association between ICMW andfirm characteristics,such as business complexity,organi-zational change,firm size,firm profitability and investment of re-sources in accounting controls(Ashbaugh-Skaife,Collins,&Kinney, 2007;Doyle et al.,2007a;Ge&McVay,2005).The implementation of SOX Section404has resulted in higher audit fees(Hoitash, Hoitash,&Bedard,2008;Raghunandan&Rama,2006),longer audit delays(Ettredge,Li,&Sun,2006)and improved audit committee quality(Krishnan,2005).Several studiesfind negative and significant cumulative abnormal returns(Beneish,Billings,&Hodder,2008;De Franco,Guan,&Lu,2005)and lower quality of earnings(Ashbaugh-Skaife et al.,2008;Chan et al.,2008)after SOX404disclosures.Closely related to our study is the literature that examines the as-sociation between earnings quality and ICMW.Chan et al.(2008) document a greater use of positive and absolute discretionary ac-cruals forfirms reporting ICMW than forfirms receiving a favourable report.Ashbaugh-Skaife et al.(2008)alsofind thatfirms reporting ICMW after the inception of SOX have lower quality accruals and sig-nificantly larger positive and negative abnormal accruals,relative to controlfirms.Both Ashbaugh-Skaife et al.(2008)and Bedard(2006)find evidence of improvements in earnings quality after the remedia-tion of ICMW under Section404,whereas Doyle et al.(2007b)claim lower-quality earnings under Section302,but not Section404.3SOX404sets separation implementation dates for“acceleratedfilers”(primarily largefirms),for“non-acceleratedfilers”(smallerfirms),and for foreignfirms.Specifi-cally,Section404rules required acceleratedfilers to comply beginning in2004,where-as compliance for non-acceleratedfilers and foreignfirms began in phases starting in 2006and ending in2009,at which time those two groups reach full compliance.76K.E.Brown,J.-H.Lim/Advances in Accounting,incorporating Advances in International Accounting28(2012)75–87A recent study suggests thatfirms place greater weight on earn-ings in determining incentive pay after the passage of SOX,and other concurrent reforms,because the more stringent reporting envi-ronment in the post-SOX period of2002results in less earnings man-agement(Carter et al.,2009;Hoitash et al.,2009).Carter et al.(2009) report an increase in the weight placed on earnings changes as a de-terminant of executive compensation,and a decrease in the propor-tion of compensation via salary after SOX,that is larger for CEOs and CFOs than it is for other executives.In addition,Hoitash et al. (2009)claim that changes in CFO total compensation,bonus compen-sation and equity compensation are negatively associated with dis-closures of ICMW,suggesting a performance-based compensation penalty for poor internal controls in the evaluation of CFOs.However, the empirical literature has not yet addressed whether disclosures of ICMW in the post-SOX era influence the importance of earnings in de-termining executive pay.3.The role of earnings in executive compensation contractsPrior research has identified accounting earnings and stock returns as the two implicitfirm performance indicators commonly used to determine executive compensation.Accounting earnings are useful for determining executive compensation because they shield managers from market-wide variations infirm value that are beyond executives'control(Sloan,1993).Stock returns are useful because they anticipate future cashflows and reflect the long-term economic consequences of managers'actions(Sloan,1993).As a result,stock returns capture those facets of executive effort that are missing in earnings but are associated with compensation(Clinch,1991; Lambert&Larcker,1987).The usefulness of thefirm performance measures,such as earnings or returns in executive contracts,is deter-mined by its precision and sensitivity(Banker&Datar,1989),and the optimal weight on a performance measure increases as the precision times sensitivity(or the signal-to-noise ratio)increases.Sensitivity re-fers to the responsiveness of the measure to actions taken by the manager,and precision reflects the noise or variance of the perfor-mance measure conditional on the manager's actions.Consistent with prior studies,we model executive compensation as a function of both accounting earnings and returns.Based on this model specification,the weight on earnings as a performance measure,there-fore,is a function of its precision and sensitivity,relative to stock returns,in providing information about the efforts of managers.4.The impact of ICMW on the earnings–compensation relationIn this study we argue that,for several reasons,an ICMW report indicates that reported earnings capture executives'effort with less precision and is less sensitive to managerial effort thanfirms not reporting an ICMW.First,managers are potentially more likely to use accruals to intentionally bias earnings if internal controls are weak.A more effective internal control system allows less managerial discretion in the accrual process(Ashbaugh-Skaife et al.,2008;Doyle et al.,2007b),and thus reduces the ability of the management to ma-nipulate accruals for the purpose of increasing their compensation.Second,weak internal controls potentially permit accounting er-rors to occur and go undetected(Doyle et al.,2007b).An ICMW can impair the sensitivity of the earnings measure for executive compen-sation because the earnings offirms with ICMW may reflect delayed or untimely information(Chan et al.,2008).Further,the noise regard-ing managers'performance in reported earnings due to deficient in-ternal controls are likely to be unpredictable and may not be reflected in the properties of previously reported earnings numbers. For these reasons,the precision times sensitivity of earnings with regards to the manager's actions forfirms reporting ICMW is pre-dicted to be lower than that offirms not reporting a material weak-ness.If ICMW reports provide information about the precision-sensitivity relation of earnings,then they have the potential to impact the use of earnings in designing executive compensation.It is possible that the ICMW report provides no new information to compensation committees or that the committees fully adjust for earnings characteristics in designing executive compensation con-tracts.In such case,we wouldfind no association between executive cash compensation and reported earnings.However,if effective inter-nal controls provide information on the sensitivity-precision of earn-ings,then an ICMW report has the potential to impact the strength of the relation between accounting earnings and executive compensa-tion.We predict that the relation between executive compensation and accounting earnings is lower forfirms that report ICMW.This leads to ourfirst hypothesis:H1.Firms that report ICMW have lower accounting earnings–executive compensation relation thanfirms with NOMW.5.The impact of ICMW type on theearnings–compensation relationDepending on the underlying cause of the ICMW,additional monitor-ing mechanisms or substantive testing can mitigate the negative effects of poor internal controls and impact the weight placed on earnings in exec-utive compensation contracts.Consistent with Doyle et al.(2007a,b),we categorize ICMW disclosures into two categories that may have different impacts on the earnings–compensation relation.First,Account-Specific (AS)material weaknesses arise from routinefirm operations and relate to controls over specific account balances,such as accounts receivable,in-ventory,and legal proceedings,or transaction-level processes.When AS material weaknesses are identified,executives or auditors can easily audit around them by performing additional substantive procedures.In contrast,Company-Level(CL)material weaknesses reflect is-sues beyond the direct control of the executives and relate to more macro-level controls such as the control environment,general per-sonnel training,organizational-level accountability,or the overallfi-nancial reporting processes.Due to the pervasiveness of CL material weaknesses,the scope of audit efforts needs to be frequently expand-ed to deal with these more serious concerns regarding the reliability of thefinancial statement(Moody's,2006;PCAOB,2004).We there-fore expect a more negative association between disclosures of Company-Level material weaknesses and the weights of earnings in the compensation contract relative to Account-Specific weaknesses. pany-Level ICMW have a stronger negative association with the accounting earnings–executive compensation relation than do Account-Specific ICMW.6.Sample selection and research design6.1.Sample selectionWe use several sources of data:(1)Audit Analytics,(2)Compu-stat,(3)CRSP,(4)ExecuComp,(5)firms'financial statements and (6)Lexis-Nexis Academic Universe.We start by collecting data from Section404disclosures of auditors'opinions on ICMW overfinancial reporting fromfirms'Form10-Kfilings from January2004to Decem-ber2006.4To ensure that the identified acceleratedfilers under SOX 404pertain to a material weakness in internal control,we follow up our initial search offirms that receive adverse opinions on their ICMW in the Audit Analytics database with a manual check through Lexis-Nexis.For our sample period,we identify9899observations 4According to PCAOB(Standard No.2),three types of internal control overfinancial reporting exist:(1)a control deficiency,(2)a significant deficiency,or(3)material weaknesses.Since publicfirms are only required to disclose material weaknesses in Section404,our main empirical test uses all Section404reports available on Audit An-alytics,which includes3864firm-year observations from2004to2006.77K.E.Brown,J.-H.Lim/Advances in Accounting,incorporating Advances in International Accounting28(2012)75–87with clean reports and1399observations that received adverse opin-ions on theirfinancial reporting with at least one type of internal con-trol problem as a material weakness.After controlling for duplicates or non-acceleratedfilers from2004to2006,we validate1336adverse reports and9865clean reports for a total of11,201observations.5 Our research design examines the change in executive compensa-tion in the year following the ICMW.For ICMW in the years 2004–2006,we require compensation data for2004–2007to compute the change in compensation.We eliminate513ICMW and5999 NOMW(532ICMW and6415NOMW)firm-year observations for the CEO(CFO)due to missing salary and bonus data in thefirms'proxy statements or in ExecuComp.Next,we collect stock return and account-ing information from CRSP and Compustat respectively,resulting in a loss of399ICMW and129NOMW(405ICMW and223NOMW)firm-year observations for the CEO(CFO).Finally,we excludefirm-year observations from utility andfinancialfirms because these companies operate in unique regulatory environments that are likely to influence executive compensation.Thefinal sample for this study consists of 391(366)firm-year observations with ICMW and3648(3138)firm-year observations with NOMW for the CEO(CFO).We summarize our sample selection process in panel A of Table1.Panel B of Table1summarizes the ICMW subsample by the type of weakness.Following the recommendations of the PCAOB's Standard No.2and Moody's(Doss&Jonas,2004;Doyle et al.,2007a,b),two types of material weaknesses can be classified based on different ob-jectives.Our study identifiesfirms as having either an Account-Specific(AS)or Company-Level(CL)material weakness.6Of the391 (366)firm-year observations of ICMW reported subsample,162 (140)were Company-Level and229(226)were Account-Specific weaknesses for the CEO(CFO)subsample.Panel C of Table1summarizes the industry distribution of the CEO sample of391firm-years with ICMW and the3648firm-years without some kind of material weakness based on their two-digit SIC codes.The391ICMWfirm-years cover six industry groups.Among them,the Ser-vices industry has the highest number offirms,followed by the Machin-ery,Construction and manufacturing,and the Wholesale and retail industries.The industry distribution for3648NOMWfirm-years has the highest number of observations in the Services industry followed closely by the Machinery and Construction and manufacturing industries.6.2.Research designTo test H1,that predicts a lower strength in the earnings–compensation relation when thefirm reports an ICMW under Section 404of SOX,we use the following model(1):ΔCashComp i;t¼β0þβ1ICMW i;t−1þβ2ΔROA i;tþβ3RET i;tþβ4ICMW i;t−1⁎ΔROA i;tþβ5ICMW i;t−1⁎RET i;tþβ6LOSS i;tþβ7LOSS i;t⁎ΔROA i;tþβ8LOSS i;t⁎RET i;tþβ9SIZE i;tþβ10MTB i;tþβ11CEOCHAIR i;tþβ12IndAC i;tþβ13IndBD i;tþβ14BoardMeetings i;tþβ15AcctExp i;tþYEARþINDþεtð1ÞConsistent with prior studies,we focus on cash compensation be-cause almost allfirms explicitly use accounting measures as a deter-minant of cash bonus(Murphy,2000;Core,Guay,&Larcker,2003; Huson,et al.2012).No such evidence exists for the association be-tween equity-based pay and earnings because stock option grants are offered not only to reward executives but also to introduce con-vexity in executive compensation contracts,for retention purposes and because of tax andfinancial reporting costs(Core et al.,2003).7 Similar to Hoitash et al.(2009),our dependent variable is the change in salary plus bonus pay from year t−1to year t deflated by the beginning of the year salary in year t(ΔCashComp).Our indepen-dent variables are(1)an internal controls deficiency indicator vari-able(ICMW or CL/AS)at time t−1,(2)the percentage change in return on assets(ΔROA),(3)stock returns(RET)and(4)interaction terms between the internal controls deficiency indicator and the per-centage change in both ROA and stock returns.We include annual stock returns for the year t in the model specification because a mean-ingful association between compensation andfirm performance must include returns(Murphy,1998;Sloan,1993).The parameter estimateβ4on ICMW∗ΔROA examines H1.Under the null hypothesis that the sensitivity of executive compensation to earnings is unaffected by internal control deficiency,the parameter,β4would be insignificant.However,we predict that the weight assigned to earnings will decrease with ICMW disclosures.As such, we expect the estimateβ4for the interaction ICMW∗ΔROA to be neg-ative and significant.It is possible that,with poor internal controls,5After controlling for97duplicates or non-acceleratedfilers from2004to2006,we validate1336adverse reports(relating to452firms in2004;487firms in2005;and 397firms in2006)and9865clean reports(2478firms in2004;3478firms in2005; and3909firms in2006)for a total of11,201observations.6We want to thank one of the authors(Doyle et al.,2007a,b)for the conceptual foundations of these two types of ICMW and the coding validations.Our classification of a Company-Level vs.an Account-Specific material weakness is mutually exclusive. For example,if afirm has both Company-Level weaknesses and Account-Specific ma-terial weaknesses,then we code thefirm as having a Company-Level weakness(Doyle et al.,2007a).In addition,three or more Account-Specific material weaknesses are cod-ed Company-level Weaknesses(Doyle et al.,2007b,p.1149).Table1Sample selection and descriptive statistics(January2004–December2007).Panel A:Sample selection and sample compositionCEO subsample CFO subsampleICMW NOMW10-Kfilings from Audit Analytics andsubsequent manual review2004–20061399989913999899 Less:Duplicate observations(63)(34)(63)(34) SOX404disclosure data2004–20061336986513369865 Missing compensation data2004–2007(513)(5999)(532)(6415) Missing Compustat&CRSP data2004–2007(399)(129)(405)(223) Less:Utilities&financialfirms2004–2007(33)(89)(33)(89) Testing H1&H239136483663138 Panel B:Samplefirms by types of ICMWCompany-Level(CL)Account-Specific(AS)CEO CFO CEO CFO 20046860108107 200560528886 200634283333 Panel C:Sample composition by industry(CEO sample)2-digitSICIndustry description ICMW NOMW#Obs.%#Obs.%10–13Mining11 2.8171 4.7 23–34Construction and manufacturing6516.677521.2 35–39Machinery9724.879721.8 42–49Transportation and utilities4411.349413.5 50–59Wholesale and retail4912.539210.7 72–87Services12532.0101927.97For these reasons any inferences that we draw about internal control weaknesses and the use of earnings from tests using equity based compensation would be incon-clusive.Additionally,the importance of earnings in determining executive cash based pay has increased in the post-Sox era,which is the period that we examine(Carter et al.,2009).78K.E.Brown,J.-H.Lim/Advances in Accounting,incorporating Advances in International Accounting28(2012)75–87。

Quality Assurance and Control质量保证和质量控制MICHAEL C. VANDERZWANPharmaceutical Technical, Roche Pharmaceuticals, Basel, SwitzerlandI. Introduction介绍. . . . . . . . . . . . . . . . . . . . . . . . . . . 235II. Defining and Assuring the Quality of the Active Pharmaceutical Ingredient 原料药质量的定义和保证. . . . . . . . . . . . . . . . . . 240III. The Regulations for Quality 质量监管. . . . . . . . . . . . . . . . . 245IV. The Quality Control and Quality Assurance Department质量控制和质量保证. . . . . . . . . . . . . . . . .273Appendix A附录. . . . . . . . . . . . . . . . . . . . . . . . . . . 280目录I. INTRODUCTION介绍 (4)A. The Product产品 (4)B. The Process工艺 (5)C. The Facilities设备 (5)D. The People人员 (6)E. The Quality Management Department质量管理部门 (6)F. The Regulatory Authorities 监管机构 (7)G. The Regulations法规 (8)II. DEFINING AND ASSURING THE QUALITY OF THE ACTIVE PHARMACEUTICAL INGREDIENT 原料药质量的定义和质量保证 (9)A. Defining the API Quality 原料药质量的界定 (10)B. Testing the API for Its Defined Attributes 原料药定义的属性测试 (11)C. Designing Quality into the Process 工艺中的质量设计 (12)D. Validation of the Process 工艺验证 (13)E. Reality实际 (15)III. THE REGULATIONS FOR QUALITY质量法规 ................ 错误!未定义书签。

Title: The Importance of Internal ControlsIn the contemporary business landscape, the significance of internal controls cannot be overstated. Internal controls refer to the policies, procedures, and mechanisms implemented by an organization to safeguard its assets, ensure accurate reporting, promote compliance with regulations, and foster operational efficiency.Firstly, internal controls are essential for safeguarding the assets of an organization. Through effective financial controls, segregation of duties, and regular audits, an organization can minimize the risk of fraud, misappropriation, and waste. This ensures that the organization's resources are utilized efficiently and for the intended purposes.Secondly, internal controls are vital for ensuring accurate financial reporting. Accurate financial statements are crucial for decision-making, investor confidence, and compliance with regulatory requirements. Internal controls help to ensure that all transactions are properly recorded, accounted for, and reported in a timely and accurate manner.Moreover, internal controls promote compliance with laws, regulations, and ethical standards. By establishing clear policies and procedures, organizations can ensure that their employees understand and adhere to the applicable rules and regulations. This not only reduces the risk of legal and reputational damage but also fosters a culture of integrity and trust.Furthermore, internal controls contribute to operational efficiency. By identifying and addressing bottlenecks, waste, and inefficiencies, organizations can improve their operational performance and enhance their profitability. Effective internal controls can also reduce the cost of compliance by automating routine tasks and minimizing the need for manual intervention.In conclusion, internal controls are an indispensable aspect of any successful organization. They safeguard assets, ensure accurate reporting, promote compliance, and foster operational efficiency. By establishing and maintaining robust internal controls, organizations can create a sustainable competitive advantage in today's challenging business environment.。

内部控制英文文献目录1. 内部控制管制对盈余质量的影响：来自德国的证据( March 2008 )The effect of internal control regulation on earnings quality: Evidence from Germany2. 内部控制制度如何影响财务报告？( Altamuro ，June 24, 2009)How Does Internal Control Regulation Affect Financial Reporting3. 财务报告内部控制缺陷的决定因素( Doyle ，May 15, 2006)Determinants of weaknesses in internal control over financial reporting4. 应计质量与财务报告内部控制( Doyle，January 24, 2007)Accruals Quality and Internal Control over Financial Reporting5. SOX 内部控制缺陷对公司风险与权益资本成本的影响( Ashbaugh-Skaife ，June 10, 2008) The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity6. 审计委员会质量、审计师独立性与内部控制缺陷( Zhang)Audit Committee Quality, Auditor Independence, and Internal Control Weaknesses7. 小企业受益于内部控制缺陷审计师认证吗Do Small Firms Benefit from Auditor Attestation of Internal Control Effectiveness8. 内部控制缺陷的决定因素( Jahmani)Determinants of Internal Control Weaknesses In Accelerated Filers9. 操控性应计项目能帮助区分内部控制缺陷和欺诈吗Do Discretionary Accruals Help Distinguish between Internal Control Weaknesses and Fraud10. 财务报告质量对债务契约的影响：来自内部控制缺陷报告的证据 ( Costello ，September 4, 2010) The impact of financial reporting quality on debt contracting: Evidence from internal control weakness reports11. 重大内部控制缺陷与盈余管理Material Internal Control Weaknesses and Earnings Management in the Post-SOX Environment12. 家族企业的内部控制( April 2013 )Internal Controls in Family-Owned Firms ()13. 内部控制质量对企业并购绩效的影响研究Study on the Impact of the Quality of Internal Control on the Performance of M&A14. 内部控制质量与信用违约互换利差( January 2014)Internal Control Quality and Credit Default Swap Spreads15. 家族企业内部控制：特征和后果Internal Control in Family Firms: Characteristics and Consequences16. 内部控制报告与会计信息质量：洞察”遵守或解释的“内部控制制度Internal control reporting and accounting quality ：Insight "comply-or-explain" internal control regime17. 内部控制报告与会计稳健性Internal Control Reporting and Accounting Conservatism18. 会计信息质量影响产品市场契约吗？来自政府合同授予的证据( March 2014 )Does Accounting Quality Influence Product Market Contracting? Evidence from Government Contract Awards19. 公司特征与财务报告质量：尼日利亚制造业上市公司的证据20. 内部控制情况与专家审计师选择The Association between Internal Control Situations and Specialist Auditor Choices21. 审计费用反应了控制风险的风险溢价吗( 2013-07 )Do Audit Fees Reflect Risk Premiums for Control Risk?22. 内部控制质量与审计定价Internal Control Quality and Audit Pricing under the Sarbanes-Oxley Act23. 内部控制缺陷与权益资本成本：来自萨班斯法案404 节披露的证据Internal Control Weakness and Cost of Equity: Evidence from SOX Section 404 Disclosures24. 内部控制缺陷与信息不确定性Internal Control Weaknesses and Information Uncertainty25. 重大内部控制缺陷与股票价格崩溃危险：来自404 条款披露的证据( May 2013 )Material Weaknessin Internal Control and Stock Price Crash Risk: Evidence from SOX Section 404 Disclosure 26. SOX 内部控制缺陷对公司风险与权益资本成本的影响The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity27. 信用评级、债务成本与内部控制信息披露：SOX302 和SOX404 法的比较28. 萨班斯-奥克斯利法案对会计信息债务契约价值的影响The Effect of Sarbanes-Oxley on the Debt Contracting Value of Accounting Information29. 财务报告内部控制的不利意见与审计师解聘/辞职Adverse Internal Control over Financial Reporting Opinions and Auditor Dismissals/Resignations30. 新管理人员任命与随后的SOX 法案404 的意见Appointment of New Executives and Subsequent SOX 404 Opinion31. 萨班斯奥克斯利：有关萨班斯法案404 影响的证据Sarbanes-Oxley: The Evidence Regarding the Impact of Sox 40432. 内部控制有效性自愿披露的经济决定因素及后果：从首次公开发行的证据( March 2013 ) Economic Determinants and Consequences of Voluntary Disclosure of Internal Control Effectiveness: Evidence from Initial Public Offerings33. 非营利组织中内部控制问题的原因和后果The Causes and Consequences of Internal Control Problems in Nonprofit Organizations34. SOX 内部控制披露在公司控制权市场中的价值The Value of SOX Internal Control Disclosures in the Market for Corporate Control35. 内部控制缺陷与销售、一般的及行政费用的非对称性行为Internal Control Weakness and the Asymmetrical Behavior of Selling, General, and Administrative Costs36. 内部控制缺陷及补救措施披露对投资者感知的盈余质量的影响The Impact of Disclosures of Internal Control Weaknesses and Remediation on Investor-Perceived Earnings Quality37. 内部控制缺陷与美国上市的中国公司与美国公司的审计师SOX Internal Control Deficiencies and Auditors of U.S.-Listed Chinese versus U.S. Firms38. 内部控制信息披露与代理成本—来自瑞士的非金融类上市公司的证据( January 2013) Internal Control Disclosure and Agency Costs Evidence from Swiss listed non-financial Companies39. 萨班斯奥克斯利法案与公司投资：来自自然实验的新证据The Sarbanes-Oxley Act and Corporate Investment: New Evidence from a Natural Experiment40. 国内投资者保护、所有权结构与交叉上市公司遵守SOX 要求披露内部控制缺陷Home Country Investor Protection, Ownership Structure and Cross-Listed Firms 'Compliance with SOX-Mandated Internal Control Deficiency Disclosure41. 审计师对披露重大缺陷相关风险的看法Auditors ' Percenpsti o f the Risks Associated with Disclosing Material Weaknesses42. 交叉上市公司提供与美国公司相同质量的披露？来自萨班斯-奥克斯利法案302 条款下的内部控制缺陷信息披露的证据Do cross-listed firms provide the same quality disclosure as U.S. firms? Evidence from the internal control deficiency disclosure under Section 302 of the Sarbanes-Oxley Act43. 内部控制缺陷与并购绩效Internal Control Weaknesses and Acquisition Performance44. 萨班斯-奥克斯利法案302 条款下的内部控制缺陷对审计费用的影响The Effect of Internal Control Weakness under Section 404 of the Sarbanes-Oxley Act on Audit Fees45. 审计师对财务报告内部控制的评价对审计费用、债务成本及净遵从收益The Effect of Auditors ' Assessment of Internal Control of over Financial Reporting on Audit Fees, Cost of Debt and Net Compliance Benefit46. 上市公司披露的信息含量与萨班斯-奥克斯利法案Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act47. 财务错报与股票市场的契约：从增发的证据Financial Misstatements and Contracting in the Equity Market: Evidence from Seasoned Equity Offerings48. 公司治理质量与SOX 302 条款下内部控制报告Corporate Governance Quality and Internal Control Reporting Under Sox Section 30249. 审计委员会质量、审计师独立性与内部控制缺陷Audit Committee Quality, Auditor Independence, and Internal Control Weaknesses50. SOX404 条款的影响：成本，盈余质量与股票价格The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices51. 内部控制缺陷与银行贷款契约：来自SOX404 条款披露的证据Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures52. 审计师对财务报告内部控制的决策：分析、综合和研究方向Auditors I'nternal Control Over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions 53. 应计质量与财务报告内部控制( Doyle ，The Accounting Review, forthcoming )Accruals Quality and Internal Control over Financial Reporting54. 业绩基础CEO 和CFO 薪酬对内部控制质量的影响The impact of performance-based CEO and CFO compensation on internal control quality55. 内部控制重大缺陷与CFO 薪酬Internal Control Material Weaknesses and CFO Compensation56. 财务报告内部控制缺陷的决定因素Determinants of weaknesses in internal control over financial reporting57. 内部控制与管理指南Internal Control and Management Guidance58. 2002 萨班斯-奥克斯利法案302 条款下内部控制缺陷的市场反应以及这些缺陷的特征Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of thoseWeaknesses under Section 302 of the Sarbanes Oxley Act of 200259. 自愿报告内部风险管理和控制系统的经济激励Economic Incentives for Voluntary Reporting on Internal Risk Management and Control Systems60. 后萨班斯法案时代审计意见的信息含量The information content of audit opinions in the post-sox era61. 上市公司披露的信息含量与萨班斯-奥克斯利法案( April, 2010 )Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act62. 信息摩擦如何影响公司资产流动性的选择？萨班斯法案404 条款的影响How do Informational Frictions Affect the Firm s Choice of A'sset Liquidity? The Effect of SOX Section 404 63. 已审计的信息披露给资本市场参与者带来利益是什么( December 19, 2013)What are the benefits of audited disclosures to equity market participants64. 诉讼风险与审计定价：公众股权的作用( January 7, 2013)Litigation Risk and Audit Pricing: The Role of Public Equity65. 萨班斯-奥克斯利法案对IPO 和高收益债券发行人的影响The Impact of Sarbanes-Oxley on IPOs and High Yield Debt Issuers66. 来自金融危机的公司治理的经验教训The Corporate Governance Lessons from the Financial Crisis67. 谁对企业欺诈吹口哨Who Blows the Whistle on Corporate Fraud68. 内部控制缺陷与现金持有价值Internal Control Weakness and Value of Cash Holdings69. 民族文化和制度环境对内部控制信息披露的影响The impact of national culture and institutional Environment on internal control disclosures70. 财务报告质量与权益资本成本之间联系的讨论：一些个人的意见( June 6, 2013)Some Personal Observations on the Debate on the Link between Financial Reporting Quality and the Cost of Equity Capital71. 使用盈利预测同时估计企业层面的权益资本成本和长期增长Using Earnings Forecasts to Simultaneously Estimate Firm-Specific Cost of Equity and Long-Term Growth72. 高管薪酬差距与权益资本成本Executive Pay Disparity and the Cost of Equity Capital73. 财务报告质量与公司债券市场(博士论文，Mingzhi Liu, 2011 )Financial Reporting Quality and Corporate Bond MarketsReferencesAboody, D., J. 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THE ACCOUNTING REVIEWV ol.83,No.12008pp.217–250The Effect of SOX Internal Control Deficiencies and Their Remediation onAccrual QualityHollis Ashbaugh-SkaifeUniversity of Wisconsin–MadisonDaniel W.CollinsThe University of IowaWilliam R.Kinney,Jr.The University of Texas at AustinRyan LaFondMassachusetts Institute of Technology and Algert Coldiron InvestorsABSTRACT:This paper investigates the effect of internal control deficiencies and theirremediation on accrual quality.Wefirst document thatfirms reporting internal controldeficiencies have lower quality accruals as measured by accrual noise and absoluteabnormal accruals relative tofirms not reporting internal control problems.Second,wefind thatfirms that report internal control deficiencies have significantly larger positiveand larger negative abnormal accruals relative to controlfirms.Thisfinding suggestsinternal control weaknesses are more likely to lead to unintentional errors that add noiseto accruals than intentional misstatements that bias earnings upward.Third,we doc-ument thatfirms whose auditors confirm remediation of previously reported internalcontrol deficiencies exhibit an increase in accrual quality relative tofirms that do notremediate their control problems.Finally,wefindfirms that receive different internalcontrol audit opinions in successive years exhibit changes in accrual quality consistentwith changes in internal control quality.Collectively,our cross-sectional and intertem-poral change tests provide strong evidence that the quality of internal control affectsthe quality of accruals.Keywords:SOX;internal control;accrual quality;financial reporting reliability.We thank seminar participants at Emory University,University of Houston Accounting Research Conference,Penn State Research Conference,University of Technology–Sydney,Washington University in St.Louis,and the Uni-versity of Wisconsin–Madison and two anonymous reviewers for helpful comments on previous versions of this paper.Editor’s note:This paper was accepted by Dan Dhaliwal.Submitted June2006Accepted August2007217218Ashbaugh-Skaife,Collins,Kinney,and LaFondThe Accounting Review,January 2008I.INTRODUCTIONT he reliability of financial reporting is claimed to be a function of the effectiveness of a firm’s internal control (PCAOB 2004;Donaldson 2005).1However,research to date provides mixed evidence on whether internal control weaknesses adversely af-fect accrual quality,an important component of reliable financial statements (Hogan and Wilkins 2005;Bedard 2006;Doyle et al.2007).This paper uses recently available data on the effectiveness of firms’internal controls mandated by the Sarbanes-Oxley Act (SOX)and the PCAOB’s Auditing Standards (AS)No.2to investigate how internal control quality affects the reliability of financial information (U.S.Congress 2002;PCAOB 2004).We posit that if a firm has weak internal control,managers are less able to determine reliable accrual amounts,and a consequence of these unintentional misrepresentations is that finan-cial information is more noisy and less reliable.In addition,managers of firms with weak internal control can more readily override the controls and intentionally prepare biased accrual estimates that facilitate meeting their opportunistic financial reporting objectives.Thus,regardless of whether misstatements are unintentional or intentional,the quality of accruals is likely diminished when firms have weak internal controls.We use SOX-mandated internal control deficiency (ICD)disclosures and external au-ditor opinions on internal control to conduct both cross-sectional and within-firm intertem-poral change tests of whether the effectiveness of firms’internal control affect the quality of reported accruals.Specifically,we test whether:(1)firms that have ICDs exhibit noisier accruals and larger abnormal accruals (both absolute and signed)relative to firms not dis-closing ICDs;(2)firms whose external auditors verify remediation of previously disclosed ICDs subsequently exhibit higher quality accruals relative to firms failing to remediate their control problems;and (3)firms that receive different SOX 404audit opinions in successive years exhibit improvements (declines)in accrual quality consistent with strengthened (weakened)internal controls indicated by the different opinions.To conduct our tests,we identify a sample of firms that have at least one SOX 404audit opinion on internal control (i.e.,accelerated filers).We look back to determine whether a sample firm disclosed an ICD under SOX 302and look forward to see if the firm received a second SOX 404opinion.2Managements’prior internal control disclosures in combination with external audit reports allow us to conduct change analysis tests to provide strong evidence on whether weak internal control diminishes the quality of firms’reported accruals.In cross-section tests,we find that ICD firms have larger absolute,larger positive,and larger negative abnormal total and abnormal working capital accruals relative to non-ICD 1In Auditing Standards No.2,the Public Company Accounting Oversight Board (PCAOB 2004)states:‘‘The Board believes that effective controls provide the foundation for reliable financial reporting.Congress believed this too,which is why the new reporting by management and the auditor on the effectiveness of internal control over financial reporting received such prominent attention in the [SOX]Act.Internal control over finan-cial reporting enhances a company’s ability to produce fair and complete financial reports.Without reliable financial reports,making good judgments and decisions about a company becomes very difficult for anyone,including the board of directors,management,employees,investors,lenders,customers,and regulators.The auditor’s reporting on management’s assessment of the effectiveness of internal control over financial reporting provides users of that report with important assurance about the reliability of the company’s financial reporting ’’(para.E.5.,Appendix E,Background and Basis for Conclusions)(emphasis added).2Section 302of SOX,which became effective in August 2002,requires senior management to evaluate internal controls over financial reporting and certify the effectiveness of the controls (see Ashbaugh-Skaife et al.[2007]for a discussion of the SOX 302reporting requirements).Section 404of SOX requires that public company annual filings contain management’s assessment of the design and operating effectiveness of its internal control and that the external auditor provide an opinion on management’s assessment (Securities and Exchange Com-mission [SEC]2002).Auditing Standards No.2(AS No.2)requires that the auditor form and express a separate opinion on the auditor’s evaluation of internal control.We refer to the auditor’s own opinion as the ‘‘SOX 404opinion.’’The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality219firms.In addition,wefind that accruals of ICDfirms map less reliably to past,current,and future cashflows.All of these results are consistent with the accruals of ICDfirms being noisier and less reliable relative to accruals offirms with no reported internal control prob-lems.These results hold after controlling for conditional conservatism andfirm character-istics that prior research has shown to be related to accrual quality.As to intertemporal changes in the effectiveness of internal controls,wefind thatfirms that disclose an internal control problem and subsequently receive an unqualified SOX404audit opinion exhibit a decrease in absolute abnormal accruals relative to the year when internal control problems arefirst reported.Wefind no evidence that this decrease is due tofirms becoming more conservative in their accounting choices.In contrast,firms identified as having internal control problems that subsequently receive an adverse SOX404opinion exhibit no signif-icant change in the magnitude of abnormal accruals.Our analysis of successive year SOX404opinions reveals thatfirms whose internal controls improve(going from adverse to unqualified SOX404opinions)exhibit a modest increase in accrual quality,whilefirms whose internal controls worsen(going from un-qualified to adverse SOX404opinions)exhibit a significant decrease in accrual quality. Firms with the same SOX404opinion in successive years(unqualified or adverse in both years)exhibit no change in accrual quality.Collectively,our cross-sectional and intertemporal change tests are consistent with the notion expressed by Congress and regulators that strong internal controls provide a signif-icant long-term benefit in improving the accuracy offinancial reporting that leads to higher quality information forfirms’external stakeholders(Donaldson2005;U.S.House of Rep-resentatives2005;U.S.Senate2002,2004).Our study makes several contributions.First,we add to the literature that seeks to identify the determinants of accrual quality,much of which focuses on innatefirm operating characteristics as the primary determinants of accrual quality(Dechow and Dichev2002; Dechow et al.1995;Francis et al.2004;Kothari et al.2005)or intentional misuse of accounting discretion to manipulate earnings through accruals(Dechow et al.1996).Our study is one of thefirst to investigate how internal control,which is intended to attenuate both intentional and unintentional misstatements,affects the quality of accruals and thereby the reliability offinancial statements.We empirically link the strength offirms’internal control overfinancial reporting to the quality of accruals through the use of SOX302and SOX404reporting.Most importantly,because independent auditors’SOX404opinions provide unambiguous signals about changes in the effectiveness offirms’internal controls, our research design allows tests of the effects of changes in internal control quality on accrual quality in ways that minimize competing explanations for our results.This study also contributes to the literature designed to assess thefinancial reporting consequences of SOX.While much of the prior literature addresses the costs of imple-menting and auditing SOX requirements(Li et al.2008;Zhang2007;Berger et al.2005), our study is among thefirst to provide evidence about potential benefits of strong internal control in terms of the quality of externally reportedfinancial information.Our research is most closely related to concurrent studies by Hogan and Wilkins(2005), Bedard(2006),and Doyle et al.(2007)that examine the relation between internal control weaknesses and earnings(accrual)quality.Hogan and Wilkins(2005)find no difference in the Dechow and Dichev(2002)measure of accrual noise between ICDfirms and a set of controlfirms and only modest differences in absolute abnormal total accruals using the modified Jones model(Dechow et al.1995).Bedard(2006)finds no difference in the absolute value of unexpected total accruals between ICD and controlfirms in the two years prior to the ICDfirms’disclosures and in the two years that follow disclosure.However,The Accounting Review,January2008220Ashbaugh-Skaife,Collins,Kinney,and LaFond The Accounting Review,January 2008Bedard (2006)finds that ICD firms exhibit larger absolute abnormal accruals relative to control firms in the disclosure year.Doyle et al.(2007)find that firms that disclosed ICDs under SOX 302(before required internal control audits)exhibit lower accrual quality rel-ative to control firms,but these differences relate only to overall company level control problems and not to account specific weaknesses.Interestingly,Doyle et al.(2007)find no differences in accrual quality between ICD and non-ICD firms for internal control weak-nesses disclosed during the SOX 404regime.Our study extends these prior studies in several important ways.First,all three of the prior studies are restricted to cross-sectional tests of differences in accrual quality between ICD and non-ICD firms.Accordingly,as in all cross-sectional designs,there are potential concerns of endogeneity,self-selection,and correlated omitted variables,which limit the ability to draw strong causal inferences from the results.3We address these concerns by focusing on firms that received one or more SOX 404opinions and identify which firms have continuously good,continuously bad,or changes in the quality of their internal control.Incorporating SOX 404opinions is a central feature of our research design and is important because:(1)it provides an unambiguous signal from an independent third-party about the effectiveness of a firm’s internal control;(2)it allows identification of which firms were able to remediate internal control weaknesses and when the improvement took place;and (3)it allows identification of subsets of firms that experienced significant changes in internal controls from year to year.In contrast to the prior studies,we use the sequence of ICD disclosures and SOX 404opinions to conduct within-firm and across-firm testing of the effects of changes in the effectiveness of internal controls over time in ways that minimize competing explanations for observed differences in the quality of accounting accruals.By linking changes in the strength or effectiveness of internal controls with changes in measures of accrual quality,we mitigate concerns about self-selection,correlated omitted variables,and endogeneity that cloud the interpretation of results from studies that rely solely on cross-sectional tests,and we provide stronger tests of causal linkages between internal control weaknesses and the quality of external accounting numbers.The remainder of our paper is organized as follows.Section II provides institutional background and provides examples of how internal control weaknesses are likely to intro-duce noise into accruals.Section III describes the accrual quality measures used in our analysis,summarizes the determinants of accrual quality,and sets forth our predictions on the effects of internal control weaknesses and remediation on accrual quality.Section IV describes our sample and provides descriptive statistics.Section V presents our empirical findings and Section VI concludes.II.INSTITUTIONAL BACKGROUND AND EXAMPLESOF CONTROL WEAKNESSESAuditing Standards No.2(AS No.2,PCAOB 2004,para.7)defines internal control over financial reporting (ICFR)as:a process designed by ...the company’s principal executive and principal financial officers ...and effected by the company’s board of directors,management,and other personnel,to provide reasonable assurance regarding the reliability of financial report-ing and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.3Indeed,Doyle et al.(2007,30),recognize this limitation and state:‘‘[O]ur ability to infer causality between internal control problems and accrual quality is limited.’’The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality 221The Accounting Review,January 2008An ICD exists ‘‘when the design or operation of a control does not allow management or its employees,in the normal course of performing their assigned functions,to prevent or detect misstatements on a timely basis (AS No.2,para.8).Thus,ICFR is focused on timely prevention and detection of financial misstatements,whether unintentional or intentional.4Internal Control—Integrated Framework (The Framework),the external standard or criteria for evaluating ICFR quality (corresponding to GAAP for financial statements),sug-gests five components or elements of internal control:the control environment,risk assess-ments,control activities,information and communication,and monitoring (Committee of Sponsoring Organizations of the Treadway Commission [COSO]1992).5A high-quality control environment establishes the importance of internal control throughout the firm.Within such an environment,potential causes of financial misstatements are assessed as to risk and control activities are designed and put in place to mitigate important risks,and exceptions that arise are communicated to parties who can take corrective actions.Finally,the entire internal control process is monitored for exceptions by management and the internal audit function.ICDs can affect the noise and the magnitude of abnormal accruals in financial state-ments in two principal ways.One way is through random,unintentional misstatements due to the lack of adequate policies,training,or diligence by company employees.Examples are:inventory counting and pricing errors that misreport inventory on hand and related cost of sales,omission of items such as failure to record credit purchases,variation in revenue recording due to lack of specific policies (or employee discretion)for revenue recognition,expensing amounts that should be capitalized and vice versa ,inadequate basis for account-ing estimates such as the allowance of inventory obsolescence,and unreliable procedures for ‘‘rolling up’’amounts from segments and subsidiaries.These random misstatements can lead to increases or decreases in accruals and resulting net income.A second way that ICDs can adversely affect the quality of accruals is through inten-tional misrepresentations or omissions by employees or by management.These non-random misstatements typically overstate earnings for the current period,but ‘‘big bath’’write-offs or cookie jar reserves result in opportunistic understatement of current earnings as well.For example,management’s exercise of discretion in accounting choices allows financial misrepresentation through manipulation of accruals for recording important accounting es-timates such as warranty liabilities,reserves for sales returns,and allowance for uncollec-tible receivables.Furthermore,employee fraud is made possible by inadequate segregation of internal control duties.Weak internal control in the form of inadequate segregation of duties can allow the misappropriation of assets and alteration of recorded amounts by an employee that is not detected because the company has inadequate staff for monitoring,or lack of action by top management because of a lax control environment.In addition,mis-statements can be introduced into the financial reporting process through ‘‘selective over-sights or omissions’’in accumulating segment and subsidiary information for consolidated reports,as well as through management emphasizing earnings targets in instructions to employees.4There are inherent limitations in ICFR as noted in AS No.2,para.16.These limitations are due to lapses in human judgment,compliance,and diligence,plus collusion and improper management override of ICFR.While these inherent limitations cannot be eliminated,AS No.2asserts that it is possible to design into the ICFR process safeguards that will reduce the risk that they will arise.5The control environment and monitoring may be useful in protecting against manipulation of records as a response to management-prescribed targets based on financial performance.222Ashbaugh-Skaife,Collins,Kinney,and LaFondThe Accounting Review,January 2008Overall,better internal control leads to more reliable recorded amounts useful in con-ducting daily activities such as production,sales,and management of inventory,as well as reducing unintentional and intentional misstatements in external financial statements.Con-versely,weak internal control introduces noise and/or bias into accruals that adversely affect the quality of both internal and externally reported accounting numbers.Prior to the passage of the SOX in July 2002,the Foreign Corrupt Practices Act of 1977required public company management to maintain books and records that would protect corporate assets and facilitate GAAP-based financial reporting,but did not require management to evaluate or certify the effectiveness of internal control (U.S.Congress 1977).Similarly,prior to SOX,auditing standards required the independent auditor to obtain an understanding of ICFR sufficient to properly plan the substantive financial statement audit,but did not require the auditor to evaluate per se the design or operating effectiveness of ICFR.6SOX changed the required public disclosure,audit,and audit reporting with respect to internal controls in two steps.Section 302of SOX,effective August 29,2002(SEC 2002),mandates that a firm’s CEO and CFO certify in periodic SEC filings that the signing officers have ‘‘evaluated ...and have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation’’(302(a)(4)(C)and (D)).Importantly,neither SOX 302nor SEC interpretations describe procedures for evaluating controls and do not require independent audits of ICFR.However,in conducting the financial statement audit,the auditor might become aware of internal control problems and require that management acknowledge any known material weakness in its SOX 302certification.7Manage-ment certifications and ICD disclosures under SOX 302began appearing in 2003.Section 404of SOX and SEC regulations require that annual reports filed with the SEC contain management’s assessment of the effectiveness of internal control over financial reporting as of the fiscal year-end and require that this assessment be audited by the auditor of its financial statements.AS No.2(effective for larger firms for fiscal years ending on or after November 15,2004)provides guidance for the independent audit to support the auditor’s opinion on management’s report and adds a requirement that the auditor express a separate opinion about internal control effectiveness based on their own review of the firm’s internal controls.In the empirical work to follow,we use management disclosures of ICDs made under SOX 302or 404along with auditors’SOX 404opinions on the effectiveness of internal controls as signals of different levels of internal control effectiveness and test for differences in accrual quality across-and within-firms over time.Specifically,we posit that both inten-tional and unintentional misstatements are likely to be introduced into accruals measure-ments when internal controls are weak and that the quality of accruals is diminished when firms have weak internal controls.In addition,we expect that when previously disclosed ICDs are remediated,as evidenced by firms receiving an unqualified SOX 404audit opinion,accrual quality will improve.Conversely,we posit that firms that receive an adverse SOX 404opinion after receiving an unqualified SOX 404opinion in the prior year will exhibit a decrease in accrual quality.6The Foreign Corrupt Practices Act of 1977did require external auditors to report to the board of directors any material weaknesses in the firm’s internal control over financial reporting noted during conduct of the annual financial statement audit.7In particular,AS No.2,which became effective for accelerated filers for fiscal years ending on or after November 15,2004,requires the auditor to ‘‘perform limited procedures quarterly’’to determine whether material changes in internal control have occurred that should be disclosed in 302certifications (paras.202–203).The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality 223The Accounting Review,January 2008III.ACCRUAL QUALITYMeasures of Accrual QualityWe use three measures to capture accrual quality:(1)the degree to which accruals fail to map into past,current,or future cash flows (WCA NOISE );(2)absolute and signed abnormal total accruals (AB ACC );and (3)absolute and signed abnormal working cap-ital accruals (AB WCACC ).Note that WCA NOISE and the absolute AB ACC and AB WCACC measures are inversely related to accrual quality.Thus,explanatory variables with a predicted positive relation with these measures imply lower accrual quality.The WCA NOISE measure is based on the standard deviation of the residual estimated from the following regression that controls for conditional conservatism (Dechow and Dichev 2002;Ball and Shivakumar 2006):8WCA ϭ␤ϩ␤CFO ϩ␤CFO ϩ␤CFO ϩ␤ABNRET t 01t Ϫ12t 3t ϩ14tϩ␤DABNRET ϩ␤DABNRET *ABNRET ϩε(1)5t 6t t where WCA is net income before extraordinary items (Compustat #123)plus depreciation and amortization (Compustat #125)minus cash flows from operations (Compustat #308)scaled by average total assets (Compustat #6),CFO is cash flow from operations scaled by average total assets,ABNRET is the buy and hold return over the fiscal year less the equal weighted market return over the fiscal year (taken from CRSP),and DABNRET is equal to 1if ABNRET is less than 0,and 0otherwise.Note that this specification allows working capital accruals to be different depending on whether the economic climate of the firm is negative or positive,consistent with asymmetric loss versus gain recognition under con-servative accounting.We estimate Equation (1)by three-,two-,or one-digit SIC codes conditional on having at least 20firms in each SIC group.In addition,following Ball and Shivakumar (2006)we require at least five observations in the industry group to have negative ABNRET values.WCA NOISE is the standard deviation of the firm-specific resid-ual from the prior three to five years,where higher values indicate greater accrual noise,i.e.,lower accrual quality.We begin estimating AB ACC using the following OLS regression:TotalAccruals ϭ␣ϩ␣(1/lag 1asset )ϩ␣(⌬REV Ϫ⌬AR )ϩ␣PPE0123ϩ␣ABNRET ϩ␣DABNRET ϩ␣DABNRET *ABNRET ϩε456(2)where TotalAccruals is net income before extraordinary items minus CFO ,⌬REV is sales (Compustat #12)in year t less sales in year t Ϫ1,⌬AR is accounts receivable (Compustat #2)in year t less accounts receivable in year t Ϫ1,PPE is net property,plant,and equip-ment (Compustat #8),and all other variables are as previously defined.All accounting variables are scaled by beginning of fiscal year total assets,lag 1asset .As in Equation (1),we include ABNRET and DABNRET to control for conditional conservatism when esti-mating abnormal total accruals.We estimate Equation (2)by three-,two-,or one-digit SIC codes conditional on having at least 20firms in each SIC group.Similar to 8Following Ball and Shivakumar (2006),we add ABNRET and DABNRET to our three accrual quality models to control for the potential effects of conservatism on the accrual quality metrics.When modeling accrual quality without these two control variables,our results,are qualitatively similar to those reported and discussed later in this study.224Ashbaugh-Skaife,Collins,Kinney,and LaFond The Accounting Review,January 2008estimating Equation (1),we require at least five observations in the industry group to have negative ABNRET values.We use the parameter estimates from Equation (2)to calculate expected total accruals as follows:Expected Total Accruals ϭˆ␣ϩˆ␣(1/lag 1asset )ϩˆ␣(⌬Re ␯Ϫ⌬AR )012ϩˆ␣(PPE )ϩˆ␣ABNRET ϩˆ␣DABNRET345ϩˆ␣DABNRET *ABNRET .6(3)A firm’s unadjusted abnormal total accruals is set equal to the difference between TotalAccruals and Expected Total Accruals .The last step is to performance-adjust abnor-mal accruals (Kasznik 1999;Kothari et al.2005).We rank firms within each industry group into ten groups based on their prior year’s return-on-assets (ROA).AB ACC is the differ-ence between the sample firm’s ‘‘unadjusted abnormal accruals’’and the median abnormal accruals for firms in the same industry ROA decile,where the median ROA value excludes the particular sample firm.We analyze both the absolute value and signed values of AB ACC .Our estimation of abnormal working capital accruals,AB WCACC ,begins with the following OLS regression estimated by three-,two-,or one-digit SIC codes conditional on having at least 20firms in each SIC group on Compustat with at least five firms in the SIC group having negative ABNRET values:WCA ϭ␣ϩ␣(1/lag 1asset )ϩ␣(⌬REV Ϫ⌬AR )ϩ␣ABNRET0123ϩ␣DABNRET ϩ␣DABNRET *ABNRET ϩε(4)45where all variables are as previously defined.We use the parameter estimates from Equation (4)to calculate expected working capital accruals:Expected WCA ϭˆ␣ϩˆ␣(1/lag 1asset )ϩˆ␣(⌬Re ␯Ϫ⌬AR )ϩˆ␣ABNRET0123ϩˆ␣DABNRET ϩˆ␣DABNRET *ABNRET .(5)45A firm’s unadjusted abnormal working capital accruals is set equal to the difference between WCA and Expected WCA .Similar to the total accruals quality measure,we performance-adjust abnormal working capital accruals by ranking firms within each industry group into ten groups based on their prior year’s ROA.AB WCACC is the difference between the sample firm’s unadjusted abnormal working capital accruals and the median abnormal working capital accruals for firms in the same industry ROA decile,where the median ROA value excludes the particular sample firm.We analyze both the absolute value and signed values of AB WCACC .The two abnormal accrual measures are benchmarked against the average industry relation between accruals and changes in sales adjusted for changes in receivables.These two measures differ by noncurrent accruals related to property,plant,and equipment (e.g.,depreciation,amortization,and asset write-offs).The accrual noise measure captures the degree to which working capital accruals fail to map into past,current and future cash flows once again benchmarked against industry norms.While related,the two abnormal accrual measures and the accrual noise measure capture the effects of intentional and un-intentional errors due to weak controls that are distinctly different as evidenced by the fact。

質量管理體系主要詞語中英文對照表范圍scope 通則general 應用application引用標准normative reference 名詞與定義terms and definitions 一般要求general requirements 文件化要求documentation requirements 文件管制control of documents 記錄控制control of records管理責任management responsibility 管理承諾management commitment以客戶為中心customer focus責任,授權與溝通responsibility,authority and communication管理代表management representative 內部溝通internal communication管理審查輸入review input 管理審查輸出review output資源管理resource management 資源提供provision of resource資格,認知與訓練competence,awareness and training工作環境work environment 產品實現product realization產品實現的規划planning of realization processes顧客相關的過程customer-related process決定產品相關的要求determination of requirements related to the product產品相關要法語的審查review of requirements related to the product客戶溝通customer communication 設計與開發design and development設計與開發規划design and development planning設計與開發的輸入design and development inputs設計與開發輸出design and development output設計與開發的審查design and development review設計與開發的驗証design and development verification設計與開發的確認design and development validation設計與開發變更的管制control of design and development changes采購purchasing 采購過程purchasing control 采購資訊purchasing information采購品的驗証verification of purchasing product生產及服務提供production and service provision生產及服務提供之管制control of production and service provision生產與服務提供過程的確認validation of process for production and service provision 鑒別與追溯identification and traceabiltiy 客戶財產customer property產品保存preservation of product量測與監控設備的管制control of monitoring and measuring devices量測,分析與改善measurement, analysis and improvement監控與量測monitoring and measurement 內部稽核internal audit過程的量測與監控measurement and monitoring of process產品的監控與測量measurement and monitoring of product不合格品管制control of nonconformity product資料分析analysis of data 預防措施preventive action。

品质管理常用英文术语在品质管理领域，掌握一些常用的英文术语对于有效地沟通、理解和实施品质管理策略至关重要。

以下是一些常见且重要的品质管理英文术语。

一、基本术语1、 Quality 质量指产品或服务满足规定或潜在需要的特征和特性的总和。

2、 Quality Assurance （QA) 质量保证为使人们确信产品或服务能满足质量要求，在质量管理体系中实施并根据需要进行证实的全部有计划和有系统的活动。

3、 Quality Control （QC) 质量控制为达到质量要求所采取的作业技术和活动。

4、 Inspection 检验对产品或服务的一种或多种特性进行测量、检查、试验、度量，并将结果与规定的要求进行比较以确定其符合性的活动。

二、统计过程控制（SPC）相关术语1、 Process 过程将输入转化为输出的一组相互关联或相互作用的活动。

2、 Variation 变异过程的输出之间的差异。

3、 Control Chart 控制图用于区分过程中的正常变异和异常变异的一种统计工具。

4、 Upper Control Limit （UCL) 上控制限控制图中控制上限的值。

5、 Lower Control Limit （LCL) 下控制限控制图中控制下限的值。

6、 Center Line （CL) 中心线控制图中代表过程均值的线。

三、抽样检验相关术语1、 Sample 样本从总体中抽取的一部分个体。

2、 Sampling 抽样抽取样本的过程。

3、 Random Sampling 随机抽样按照随机原则抽取样本的方法。

4、 Acceptance Sampling 验收抽样确定一批产品是否可被接受的抽样检验方法。

四、缺陷与不合格相关术语1、 Defect 缺陷产品或服务中不满足预期使用要求的特性或特征。

2、 Nonconformity 不合格未满足规定的要求。

3、 Major Defect 主要缺陷可能导致产品或服务失效或严重降低其使用性能的缺陷。

Auditor Reporting under Section404:The Association between the Internal Control and Going Concern Audit Opinions*BENG WEE GOH,Singapore Management UniversityJAYANTHI KRISHNAN,Temple UniversityDAN LI,Tsinghua University1.IntroductionSection404of the Sarbanes-Oxley Act of2002(SOX)requires companies’independent auditors to provide an opinion on their clients’internal control overfinancial reporting (ICFR),in addition to the opinion on their clients’financial statements(U.S.Congress 2002).In2004,the Public Company Accounting Oversight Board(PCAOB)issued Audit-ing Standard No.2(AS2),An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements,which provided guidance to auditors for ICFR audits(PCAOB2004).AS2was subsequently replaced by Auditing Standard No. 5(AS5).1Unlike traditional audits of thefinancial statements,AS2and AS5require an “integrated audit of internal control andfinancial statements”because the“objectives of and work involved in performing both an attestation of management’s assessment of inter-nal control and an audit of thefinancial statements are closely interrelated”(PCAOB 2003a).Because,in effect,the internal control and thefinancial statement audit reports are joint products of the audit process,it is important to investigate the relation between the internal control andfinancial statement audit opinions.In this paper,we explore the association between the two audit opinions by examining whether the issuance of an adverse internal control material weakness opinion(MWO) influences,other things equal,the issuance of a going concern audit opinion(GCO)for financially stressed companies.2Although the two opinions are the result of an integrated audit process,they serve different purposes.The GCO reflects the auditor’s view of the financial condition of its client,indicating whether(in the auditor’s opinion)the client will continue to be a going concern for a period of12months beyond thefinancial year end. The MWO reflects the auditor’s opinion on whether there are material weaknesses in internal control and therefore the likelihood that material misstatements in thefinancial statements will not be detected or prevented.*Accepted by Ferdinand Gul.We thank the Editor(Ferdinand Gul),two anonymous reviewers,Bryan Church,Qi Chen,Jagan Krishnan,Yan Zhang,Yinqi Zhang,and conference participants at the2007 AAA annual meetings for helpful comments.Jayanthi Krishnan acknowledges research support from the Temple University Summer Research Fellowship and the Fox School Merves Research Fellowship.Beng Wee Goh acknowledges research support from the Singapore Management University.1.Auditing Standard No.5,An Audit of Internal Control over Financial Reporting That is Integrated with anAudit of Financial Statements,became effective forfiscal years ending November15,2007(PCAOB2007).As we discuss later,the change in standards was effected in response to concerns that AS2led to inefficient audits.2.Technically,a reference to potential“going concern”problems in an audit report is a modification to theaudit opinion of whether thefinancial statements are stated in accordance with generally accepted account-ing principles(GAAP).We refer to such a modified audit report as a going concern opinion.Contemporary Accounting Research Vol.XX No.X(X X)pp.1–27©CAAAdoi:10.1111/j.1911-3846.2012.01180.x2Contemporary Accounting ResearchDespite this difference,the two opinions could be connected.We posit that three fac-tors determine whether a MWO will trigger a GCO,given that thefirm isfinancially dis-tressed.First,although the GCO refers to the client’sfinancial viability,it is issued with the auditor also stating—in its opinion paragraph—that the client’sfinancial state-ments are stated“fairly in accordance with GAAP”.Reliable reporting is necessary for the auditor to be able to forecast cashflows and other aspects of the client’s performance, in order to make the GCO decision.3The GCO decision is a difficult and ambiguous task (Chow,McNamee,and Plumlee1987;Carcello and Neal2000)with grey areas that require auditor judgment.4Previous work has argued that,other things equal,auditors can move their“threshold”(i.e.,become more conservative)by issuing the GCO in response to factors such as uncertainties and litigation risk(Francis and Krishnan1999, 2002;Rosner2003).Thus,because the MWO indicates uncertainty about the potential reliability of thefinancial statements,it may also affect the ability to forecast the going concern status for afinancially stressed client,thus triggering the GCO.5 Second,the negative consequences associated with the MWO can make it difficult for companies infinancial distress to obtain newfinancing because it increasesfinancing costs (Beneish,Billings,and Hodder2008;Ashbaugh-Skaife,Collins,Kinney,and LaFond 2009;Dhaliwal,Hogan,Trezevant,and Wilkins2011;Kim,Song,and Zhang2011).If the auditor perceives such future difficulties,this would impact the GCO decision.Third,some responders to the AS2proposal pointed out that both companies and their auditors may be subject to greater litigation risk when a MWO is issued.6If this increases the auditor’s perceived litigation risk,the issuance of a MWO can further influence the auditor’s GCO decision.Such perceptions can be further heightened by the requirement in AS2(and now AS5)that the auditor explicitly state that it considered the effect of the MWO on the financial statement audit opinion.73.For example,in its10-Kfiling for the year ended December31,2003,Sonus Network Inc.disclosed thatit faced shareholder class action,the allegation being that“we lacked adequate internal controls and were therefore unable to ascertain our truefinancial condition.”4.Similarly,the MWO is also issued under situations of significant uncertainty(Earley,Hoffman,and Joe2008;Hoitash,Hoitash,and Bedard2008)and“criteria for judging misstatement likelihood and material-ity are likely complex to apply in practice”(Bedard and Graham2011).5.In theory,the auditor must tailor audit procedures to offset the material weakness sufficiently to ensurereliablefinancial reporting before making the GCO decision.Therefore,the MWO need not impact the GCO as long as the auditor can“audit around”the material weakness and obtain reasonable assurance about the reliability(or fairness)offinancial reporting.At the extreme,a complete inability to audit around the material weakness may result in a scope limitation opinion.In practice,less extreme situations are more likely.6.Agilent Technologies argues that AS2“will lead to disclosure of many significant deficiencies which mayaggregate to a material weakness judgment and which may cause shareholders and third parties to con-sider the risk of material misstatement to be much greater than it actually is.”Similarly,Health Insurance Plan of Greater New York states that the“auditor’s attestation of management’s assessment of internal control and the effectiveness of those controls is tantamount to a guarantee or warranty that the com-pany’s internal controls overfinancial reporting are effective and result infinancial statements that are free of material misstatement.”All comments on AS2can be found at /Rules/Rulemaking/ Pages/Docket008Comments.aspx.7.See paragraphs193–96of AS2(PCAOB2004).These paragraphs refer to the timing and content of teststhat go into the formation of the audit opinion and not the going concern modification.However,to the extent that the audit report is viewed as a whole,the requirement for such a statement can heighten perceived litigation risk.CAR Vol.XX No.X(X X)Auditor Reporting under Section4043 We examine the association between the MWO and the GCO,using a sample of1,110financially stressedfirms that reported internal control and audit opinions under SOX Section404during the period2004–2009.8Wefind that the issuance of a MWO increases the likelihood of a GCO significantly,after controlling for factors that prior studies have found to be associated with a GCO.This result holds when we control for potential endoge-neity of the MWOs,to incorporate the possibility that ourfinding is driven by unobserved latent factors that drive both GCOs and MWOs.Hence,the empirical evidence suggests that auditors do respond to the uncertainty surrounding a MWO by issuing a GCO.Further analyses corroborate this evidence.Although in theory the auditor can“audit around”the material weakness,and ensure that thefinancial statements are reliable enough to opine on,it is not clear it can always do so.Therefore,we expect that the strength of the association will differ according to the degree of uncertainty engendered by the MWO,and the degree to which the auditor can audit around the weakness to render itsfinancial statement opinion.We compare the association between the MWO and the GCO for MWOs arising out of company-level weaknesses and account-specific weaknesses. Wefind that the former,which are more difficult to audit around(Ettredge,Li,and Sun 2006;Doyle,Ge,and McVay2007a),but not the latter,are associated with GCOs.Next,we examine whether the expectation that the material weaknesses will be reme-died—which reduces the uncertainty surrounding the MWO—impacts the strength of the association between MWO and ing the removal of the MWO in the subse-quent year as the measure of expected remediation in the year the opinion is issued,we find that the association between MWO and GCO holds only for those material weak-nesses which are not subsequently remediated.We also examine whether the issuance of a MWO may hinder the ability of afirm to raise capital in the subsequent year,possibly inducing conservatism in the auditor’s GCO.Wefind a significant negative association between MWOs and subsequent changes in current debt,and a negative but marginally significant association between MWOs and subsequent changes in common stock in the subsequent year,suggesting that the MWO is likely to adversely affect futurefinancing, triggering a GCO in conjunction with the MWO.Finally,we examine whether it is the auditor’s material weakness opinion rather than the disclosure of material weakness that is associated with the GCO.Section404was pre-ceded in2002by the introduction of a related internal control rule,Section302of SOX, which required management(but not auditor)reports on the effectiveness of disclosure controls.We estimate our model using data for the Section302regime to examine the association between GCO and material weakness disclosures.Interestingly,we do not doc-ument an association between the existence of material weaknesses,as reported by man-agement,and the GCO.Taken together,our results suggest that the MWO issued under SOX Section404does increase the likelihood of a GCO,while the existence of material weaknesses in the Section302disclosures does not.Thus,auditors seem to respond to the uncertainties surrounding a material weakness by issuing a GCO only when they have to issue a MWO.Our paper makes three primary contributions.First,unlike most previous research, we examine the impact of the internal control opinion on auditors’decisions.The vast majority of the attention on Sections404and302of SOX has focused on the causes of the internal control weaknesses revealed by the ICFR auditor and management reports, 8.Restricting the sample tofinancially stressed companies is important becausefinancial distress—the keyfactor triggering the GCO—can also be one cause for the existence of material weaknesses.Conse-quently,in the absence of controls forfinancial distress,there could be a mechanical positive association between material weaknesses and GCOs.By confining the sample to distressedfirms and further control-ling for distress in our multivariate analyses,we are able to draw inferences about auditor behavior arising from uncertainties relating to the two opinion decisions.CAR Vol.XX No.X(X X)4Contemporary Accounting Researchand their consequences,measured by stock price reactions and cost of debt and equity (Ogneva,Subramanyam,and Raghunandan2007;Ashbaugh-Skaife,Collins,Kinney,and LaFond2009;Dhaliwal et al.2011).We focus instead on the overall audit,which consists of both the internal control andfinancial statement audits.Second,whereas previous GCO studies have estimated empirical models based on thefinancial statement audit only, our study is thefirst to extend the analysis to an integrated audit of internal control and thefinancial statements.Thus,we argue,studies examining the cross-sectional variations in the incidence of the GCO must consider how the internal control audit affects the out-come.Third,we shed some light on the effects of the policies relating to internal control. The purpose of Sections302and404was primarily to provide information on the internal controls,thus enhancing investor understanding of the quality offirms’financial reporting. Although this was expected to enhance the quality offinancial reporting,none of the pol-icy statements suggest that policymakers envisaged an impact on the likelihood of the GCO.To the extent the increase in the GCO likelihood is a result of auditor conservatism, ourfinding suggests the need for a broader evaluation of the effects of SOX404.The remainder of the paper is organized as follows.Section2describes the research motivation and hypothesis.Section3describes our research design and sample selection. Sections4and5describe the empirical results.Section6concludes.2.Motivation and hypothesis developmentBackgroundSOX includes two sections relating to internal control reporting.Section302,introduced in2002,requires quarterly management to report on the effectiveness of the company’s disclosure controls.Section404,introduced in2004,requires companies’independent auditors to provide an opinion on their clients’ICFR,in addition to the opinion on their clients’financial statements(U.S.Congress2002).The intended effect of the rules is to improve the reliability offirms’financial reporting(PCAOB2004;Donaldson2005).How-ever,Section404has been the subject of intense debate as critics maintain that the high costs of complying with it are not commensurate with its perceived benefits(Michaels 2003;DeFond and Francis2005;Powell2005;Romano2005).Guidance to auditors for ICFR audits was provided by AS2,which was effective for acceleratedfilers in November2004(PCAOB2004).9AS2introduced an integrated audit of internal control andfinancial statements.The standard includes extensive discussions of the relationship between the internal control audit procedures for the two audit opinions (see,e.g.,paragraphs145–58in AS2).Particularly relevant to our study,the standard dis-cusses the effect of a MWO on thefinancial statement opinion.Specifically,when the auditor issues a MWO and a clean audit opinion,it must state in its audit opinion that the material weakness“was considered in determining the nature,timing,and extent of audit tests applied in our audit of the20X3financial statements,and this report does not affect our report dated[date of report]on thosefinancial statements”(paragraph194, PCAOB2004).10A similar disclosure is required when a MWO and a non-cleanfinancial statement opinion are issued.9.Acceleratedfilers are defined as companies(a)with publicfloat(aggregate market value of voting andnonvoting common equity held by nonaffiliates)greater than$75million,(b)that have been subject to Exchange Act reporting requirements for at least12calendar months,(c)that havefiled at least one annual report,and(d)that are not eligible to use Forms10-KSB and10-QSB for their annual and quar-terly reports.SOX Section404was initially applicable to acceleratedfilers.Nonacceleratedfilers were eventually expected to comply,but the effective date for compliance was repeatedly postponed.However, the Dodd-Frank Wall Street Reform Act of2010has permanently exempted nonacceleratedfilers from compliance with Section404.10.The wording is modified if a combined report is issued for the ICFR andfinancial statement opinions. CAR Vol.XX No.X(X X)Auditor Reporting under Section4045 In2007,the PCAOB issued Auditing Standard No.5(PCAOB2007)to replace AS2. AS5emphasized a top-down,risk-based approach to ICFR audits,with the intent of elim-inating the inefficiencies that had been identified in the operation of AS2.Like AS2,AS5 specifically connects the two opinions,stating that the auditor should“disclose whether his or her opinion on thefinancial statements was affected by the adverse opinion on internal control overfinancial reporting.”Thus,SOX Section404and the related auditing standards emphasize the integration of the audits of an entity’s internal controls and itsfinancial statements,and consequently the internal control and audit reports are joint products of the audit process.It is therefore important to investigate the relation between the two audit opinions.Impact of the MWO on the GCOThe GCO expresses the auditor’s view that there is substantial doubt about its client’s ability to continue as a going concern for a period not exceeding one year beyond the financial statement date(Statement of Auditing Standard No.59,AICPA1988;Auditing Standard No.1,PCAOB2003b).Although afirm’sfinancial condition is the underlying factor triggering a GCO,the decision requires considerable judgment(Chow et al.1987; Carcello and Neal2000).Auditing standards provide a list of circumstances,such as loan defaults,work stoppages,and legal proceedings,which could raise doubts about the entity’s ability to continue as a going concern.SAS No.59requires auditors to assess management’s plans to overcome the problems causing the potential going concern prob-lem and,if not satisfied with these plans,issue a GCO.Internal control problems are not mentioned on this list or indeed anywhere in the going concern standards.However,as discussed above,the ICFR audit standards state that the internal control audit opinion (MWO)should be considered when the auditor issues thefinancial statement opinion.Given the inherent ambiguity of the going concern auditing standard,auditors likely develop afinancial distress“range”over which a GCO can be issued and select a thresh-old within that range to actually issue a GCO.Previous studies have argued that auditors move this threshold down(i.e.,become more conservative)in the face of uncertainties regarding,for example,future losses(Nelson and Kinney1997),potential litigation(Krish-nan and Krishnan1996;Geiger and Raghunandan2002),or accounting accruals(Francis and Krishnan1999).Can the issuance of a MWO be a factor that causes auditors to lower the threshold for the GCO?Consider a client whosefinancial condition indicates a potential going con-cern problem.Auditing standards for auditingfinancial statements require the auditor to acquire an understanding of internal control overfinancial reporting and conduct tests to assess control risk should the auditor decide to rely on controls.Assume that the auditor’s understanding of the client’s internal control has revealed a potential material weakness, indicating heightened control risk,requiring the auditor to design its audit to offset the risk.The standard audit risk model suggests that auditors adjust their substantive tests (e.g.,choosing not to rely on controls)to maintain audit risk at acceptable levels.The auditor assesses control risk as high,designs substantive tests and,where necessary, requires clients tofix problems relating to the reliability of thefinancial statements.Then, based on thefinancial statements that have been judged(with reasonable assurance)as being reliable,the auditor must decide whether to issue a GCO.Because the GCO decision is itself fraught with uncertainty,the outcome must depend partly on the extent to which the auditor can effectively audit around the material weak-nesses.At one extreme,if the auditor is able to successfully offset the material weaknesses through audit procedures,and thefinancial statements are judged to be reliable,the GCO can be issued independent of whether a MWO is issued.At the other extreme,if the audi-tor is unable to audit around the material weaknesses and the reliability of thefinancialCAR Vol.XX No.X(X X)6Contemporary Accounting Researchstatements cannot be ensured,it can disclaim an opinion(i.e.,not issue a MWO)or with-draw from the engagement.11In practice,however,it is likely that the extent to which the auditor can audit around the material weakness,and therefore the uncertainty surround-ing the existence of the material weakness,lies between the two extremes,causing the auditor to become conservative in the issuance of the GCO.We posit that three factors can lead to auditor conservatism in the face of a MWO. First,the implication in the audit risk model that audit plans are adjusted adequately to offset variations in control risk is not supported by research evidence.Studies that use pre-SOX data(e.g.,Mock and Wright1999)do notfind that auditors vary audit plans or audit effort based on control reliance.Likewise,studies that used audit fees as a proxy for effort(e.g.,O’Keefe,Simunic,and Stein1994;Felix,Gramling,and Maletta2001)find no association for the pre-SOX period.However,based on data for the post-SOX years,Rag-hunandan and Rama(2006),Hoitash et al.(2008),and Hogan and Wilkins(2008)find a positive association between the presence of material weaknesses as disclosed in SOX302/ SOX404disclosures and audit fees.But,as Hogan and Wilkins(2008)point out,the increased fees could also reflect a risk premium rather than increased effort.If in fact audit plans are not sufficiently risk-adjusted in the presence of material weaknesses,there is uncertainty regarding the extent of assurance offinancial statement reliability.This could make it more difficult for the auditor to evaluate the futurefinancial performance or cashflows of thefirm and hence,the ability of thefirm to operate as a going concern.For example,companies that face uncertainties about going concern pres-ent management plans—including details about intentions to increase cashflows by issu-ing more debt or equity,and/or reduce spending(Behn,Kaplan,and Krumwiede2001)—to overcomefinancial stress.If the auditor’s assessment of management plans leads to the conclusion that these are credible mitigating factors,the auditor may not issue a GCO. The credibility of these plans however depends on the perceived accuracy of future fore-casts,which in turn depends on the reliability offinancial reporting.12Consequently,the auditor may respond to the heightened uncertainty about mitigating factors and become more conservative(i.e.,move its threshold)in the GCO decision.13Second,the negative consequences associated with material weaknesses can make it more difficult for companies that are already infinancial distress to obtain capital.Beneish et al.(2008)and Ashbaugh-Skaife et al.(2009)find that ineffective internal controls are associated with increased cost of equity,possibly reflecting increased information risk. Similarly,Dhaliwal et al.(2011)and Kim et al.(2011)provide evidence that MWOs are 11.AS2(and later AS5)explains that the auditor can issue a disclaimer due to scope limitations if it cannotapply the necessary procedures to express an opinion on ICFR.If,however,the scope restrictions are imposed by management,the auditor should resign from the engagement.12.For instance,Feng,Li,and McVay(2009)find a positive relation between internal control quality and theaccuracy of management guidance,consistent with ineffective internal controls causing errors in internal management reports.13.An example is provided in PHH Corporation’s10-Kfiling for the year ended Dec31,2005(http://www./Archives/edgar/data/77776/000095012306014446/y26027e10vk.htm).The audit report states“As discussed in Note28to the consolidatedfinancial statements,the uncertainty about the Company’s ability to comply with certain of itsfinancing agreement covenants...raises substantial doubt about its ability to continue as a going concern.”Note28mentions the internal control issues:“Due to the existence of material weaknesses in the Company’s internal control overfinancial reporting and delays in completing the2005auditedfinancial statements,it is now uncertain whether the Company can issue its2006quar-terlyfinancial statements within this extended date...the uncertainty about the Company’s ability to meet itsfinancial statement delivery requirements raises substantial doubt about the Company’s ability to continue as a going concern.”CAR Vol.XX No.X(X X)Auditor Reporting under Section4047 associated with increased cost of borrowing.In addition,Kim et al.(2011)find that bor-rowers with company-level weaknesses face stiffer loan conditions,in terms of borrowing rates and collateral requirements,than those with account-specific weaknesses.The increased costs and difficulties of raising capital forfirms with MWOs can reduce their ability to overcome thefinancial distress they are facing,exacerbating the going concern problems.If the auditor anticipates these negative consequences to the issuance of a MWO,it is also likely to issue a GCO.Third,some responders to the AS2proposal pointed out that both companies and their auditors may be subject to greater litigation risk when a MWO is issued.As dis-cussed,the internal control auditing standard explicitly requires the auditor to consider the internal control opinion when determining thefinancial statement audit opinion.Thus, any litigation concern regarding the MWO is likely to carry over to the GCO due to the jointness of the two opinions.Krishnan and Krishnan(1996)and Geiger and Raghunan-dan(2002)have provided evidence that auditors become conservative in the issuance of the GCO when faced with higher litigation risk.Thus,the issuance of a MWO can further induce conservatism in the auditor’s GCO decision.In sum,although in theory the GCO need not be impacted by a MWO,the issuance of a MWO can in practice cause the auditor to move their“threshold”for issuing the GCO,thus increasing the likelihood of a GCO.Therefore,we test the following null hypothesis:H YPOTHESIS.There is no difference in the propensity of auditors to issue GCOs tofinan-cially stressed companies to which they issue a MWO and to those to whichthey do not issue a MWO.In testing our hypothesis,we also extend it to distinguish between two types of mate-rial weaknesses,company-level and account-specific pany-level material weaknesses relate to fundamental problems such as the control environment or the overall financial reporting process,and account-specific weaknesses pertain to transactions and account balances.As Moody’s Investor Services notes,some company-level material weak-nesses cannot be audited around effectively because of the“pervasive nature”of the underlying internal control problems.Thus,although in theory auditors can deal with material weaknesses through substantive tests,it may be difficult in the case of a com-pany-level weakness to determine exactly where substantive testing should occur(Doyle et al.2007a).Further,Moody’s suggests that company-level material weaknesses call into question not only management’s ability to prepare accuratefinancial reports,but also its ability to control the business(Doss and Jonas2004).It is likely therefore that the ambi-guities in the GCO decision are heightened in the presence of a MWO pertaining to a company-level weakness.Therefore we extend our tests of our hypothesis to distinguish between company-level and account-specific material weaknesses.3.Model and sample selectionRegression modelWe use the following logistic regression model to test our hypothesis:GCO¼a0þa1MWOþa2PROBANKZþa3SIZEþa4AGEþa5BETAþa6VOLATILITYþa7RETURNþa8LEVþa9CLEVþa10DLOSSþa11INVESTMENTþa12BIG4þa13OCFþa14REPORTLAGþa15PRIORGCOþa16SEGMENTSþa17RESTRUCTURINGþeð1ÞCAR Vol.XX No.X(X X)。

Quality Control and AssuranceIntroductionQuality control and assurance are vital processes in any organization that aims to deliver high-quality products or services to its customers. In this document, we will explore the concepts of quality control and assurance and their importance in ensuring the quality of products and services.Quality ControlQuality control is the process of ensuring that products or services meet specified standards and customer requirements. It includes monitoring and inspecting the production process to identify defects or non-conformities and taking corrective actions to address them. Qualitycontrol aims to prevent defects from occurring and ensure that the final product meets the desired quality standards.Key Components of Quality Control1.Inspection: Inspection involves checking the products or services at various stages of the production process to identify any defects or deviations from the standards.2.Testing: Testing is conducted to verify the performance, functionality, and quality of the products against the specified requirements.3.Quality Assurance: Quality assurance involves establishing processes and procedures to ensure that the products or services meet the desired quality standards.Quality AssuranceQuality assurance is a proactive process that focuses on preventing defects and ensuring that the products or services meet the required quality standards. It involves establishing quality management systems, implementing quality control measures, and continuously improving processes to enhance quality.Key Principles of Quality Assurance1.Customer Focus: Quality assurance should be customer-centric, focusing on meeting customer needs and expectations.2.Continuous Improvement: Quality assurance involves continuously monitoring and improving processes to enhance quality and efficiency.3.Employee Involvement: Employees at all levels should be involved in the quality assurance process to ensure accountability and commitment to quality.Importance of Quality Control and AssuranceQuality control and assurance play a crucial role in ensuring the success and reputation of an organization. By implementing effective quality control measures, organizations can minimize defects, improve customer satisfaction, and enhance their reputation in the market. Quality assurance, on the other hand, helps organizations establish a culture of quality, compliance, and continuous improvement.Benefits of Quality Control and Assurance1.Improved Customer Satisfaction: Meeting quality standards and customer requirements can lead to higher customer satisfaction and loyalty.2.Reduced Costs: By preventing defects and errors, quality control and assurance help organizations save costs associated with rework, repairs, and customer returns.3.Enhanced Reputation: Consistently delivering high-quality products or services can enhance an organization’s reputation and credibility in the market.ConclusionIn conclusion, quality control and assurance are essential processes for ensuring the quality of products and services in an organization. By implementing robust qualitycontrol measures and establishing effective quality assurance processes, organizations can improve customer satisfaction, reduce costs, and enhance their reputation in the market. It is important for organizations to prioritize quality control and assurance to achieve long-term success and sustainability.The above document provides an overview of the conceptsof quality control and assurance, their key components, principles, importance, and benefits. By following these principles and implementing effective quality control and assurance processes, organizations can enhance their performance and reputation in the market.。