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257
臺大管理論叢
第
28
卷第
1
期
(Kinney and McDaniel, 1989; DeFond and Jiambalvo, 1991; McMullen, Raghunandan,
and Rama, 1996; Eilifsen and Messier, 2000; Leone, 2007; Rice and Weber, 2012), we
regard restatement companies (non-restatement companies) as those that are more (less)
likely to have material weaknesses and thus, are more (less) likely to receive adverse
ICFR opinions. We presume that deterioration in ICFR-disclosure quality is shown by an
increase in the likelihood of Type II errors (i.e., a restatement company fails to conclude
that its internal control system is ineffective for the restated period) or an increase in the
likelihood of Type I errors (i.e., a non-restatement company concludes that its internal
control system is ineffective for the non-restatement period).
First, we focus our investigation on the effect of SOX 404. In comparison with SOX
302, additional management documentation and auditor scrutiny over ICFR required by
SOX 404 might help detect and lead to disclosure of underlying internal control problems
and thus, reduce Type II errors. However, required signatures of auditors on opinions
regarding ICFR may make auditors unduly cautious in identifying material weaknesses.
Their low thresholds for material weaknesses could result in many reported material
weaknesses that do not lead to misstatements (Doyle, Ge, and McVay, 2007a), which in
turn, may increase the likelihood of making Type I errors. The results of our study show
that restatement companies subject to SOX 404 are less likely to conclude that their ICFR
is effective than those subjected to SOX 302. In the non-restatement sample, we found no
differences in the likelihood of concluding that the company’s ICFR is ineffective between
companies subjected to SOX 404 and those subjected to SOX 302. Therefore, the
enactment of SOX 404 reduces Type II errors of ICFR disclosures without increasing
Type I errors.
Next, we turn our focus to the effect of AS5 on ICFR-disclosure quality. As
mentioned previously, the PCAOB amended AS2 and proposed AS5 for achieving an
optimal balance between the costs and benefits of ICFR audits. By eliminating
unnecessary procedures and testing in audits of internal controls, AS5 emphasizes
reallocating resources to important and high-risk areas (SEC, 2007). We expect that AS5
has improved not only the efficiency but also the efficacy of audits of internal controls and
thereby, has reduced ICFR-disclosure errors, including both Type I and Type II errors.
However, concerns exist over the controversial risk-based audit approach adopted in AS5
because it might give auditors more latitude in their professional judgment. Risk-based
audit approaches have been associated with some highly visible audit failures (e.g.,