| Summary: | 碩士 === 國立臺灣大學 === 會計學研究所 === 97 === In this study we investigate the effect of disclosing weakness in internal control over financial reporting on accruals quality. For 170 firms in each of material weakness firms and non-material Weakness (control) firms per year from 2000 to 2007, the pooled cross-sectional analysis brings a total of 2,720 firm-year observations in full sample. We develop the measure, discretionary accruals, by modified Jones model (Dechow et al, 1995) to examine the change of discretionary accruals before and after disclosing material weakness in internal control. In addition, we break the material weaknesses into weaknesses related to control environment and weaknesses unrelated to control environment to test which one provide more improvement in accruals quality after disclosing year.
Empirical results are as follows: First, we document a significant negative association between absolute (positive and negative) discretional accruals and material weakness firms after disclosing year. It suggests that disclosures of internal control weaknesses can reduce the opportunity of earnings management, help develop more effective internal control system and increase the reliability of financial reporting. Second, we find weak evidence that, after disclosing year, the extent of significant negative association between firms with control environment-related weakness and discretionary accruals is greater than the association between firms with control environment-unrelated weakness and discretionary accruals. It indicates that improvement in accruals quality after firms disclosing weakness related to control environment is greater than the other type of firm.
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