Restating Internal Control Reports following Financial Statement Restatements: Determinants and Consequences

Abstract

After restating their financial statements, companies may voluntarily restate their previously issued internal control (IC) reports for the financial statement (FS) misstatement periods changing them from “effective” to “ineffective.” When announcing these IC restatements, companies often provide a detailed explanation of the IC problems and a discussion of their plans to remediate these problems. We find that companies with less severe IC problems which can be remediated more quickly are more likely to restate their IC reports. Moreover, these results are driven by companies with a higher need for external financing, suggesting that IC restaters voluntarily restate their IC reports in order to inform investors about their less severe IC material weaknesses and their plans to improve IC quality. Finally, we find that, relative to other FS restatement companies, IC restaters have a lower likelihood of Chief Financial Officer turnover and auditor resignation following the FS restatement.

Keywords: restatements, internal control, CFO turnover, auditor resignation

JEL Classification: M41