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The influence of the auditor's report on investors' evaluations after the Sarbanes‐Oxley Act

The influence of the auditor's report on investors' evaluations after the Sarbanes‐Oxley Act Purpose – This research study aims to examine how differences in opinions on the material weaknesses identified in the auditor's assessment of the financial statements, and the auditor's assessment of internal control affect investment analysts' assessment of the financial strength of the company and willingness to recommend the stock for purchase to clients. It also aims to examine how the auditor's opinion on management's assessment of internal control affects investment analysts' assessment, providing additional evidence of the appropriateness of the elimination of this requirement under Auditing Standard No. 5. Design/methodology/approach – The paper examines these research questions using data from a laboratory experiment with investment analysts as participants in the study. Findings – The findings indicate that adverse audit opinions on the effectiveness of internal control result in investment analysts making a higher assessment of company risk, a lower assessment of the strength of internal control over financial reporting, and a marginally significant difference in the likelihood of recommending stock to their client. Research limitations/implications – These findings provide evidence that auditors' assessment of internal control risk provides information to investment analysts. Originality/value – This study contributes to the literature by examining the implications of Section 404 of the Sarbanes‐Oxley Act on the judgment of users of financial statements. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Auditing Journal Emerald Publishing

The influence of the auditor's report on investors' evaluations after the Sarbanes‐Oxley Act

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0268-6902
DOI
10.1108/02686900810839848
Publisher site
See Article on Publisher Site

Abstract

Purpose – This research study aims to examine how differences in opinions on the material weaknesses identified in the auditor's assessment of the financial statements, and the auditor's assessment of internal control affect investment analysts' assessment of the financial strength of the company and willingness to recommend the stock for purchase to clients. It also aims to examine how the auditor's opinion on management's assessment of internal control affects investment analysts' assessment, providing additional evidence of the appropriateness of the elimination of this requirement under Auditing Standard No. 5. Design/methodology/approach – The paper examines these research questions using data from a laboratory experiment with investment analysts as participants in the study. Findings – The findings indicate that adverse audit opinions on the effectiveness of internal control result in investment analysts making a higher assessment of company risk, a lower assessment of the strength of internal control over financial reporting, and a marginally significant difference in the likelihood of recommending stock to their client. Research limitations/implications – These findings provide evidence that auditors' assessment of internal control risk provides information to investment analysts. Originality/value – This study contributes to the literature by examining the implications of Section 404 of the Sarbanes‐Oxley Act on the judgment of users of financial statements.

Journal

Managerial Auditing Journal – Emerald Publishing

Published: Jan 4, 2008

Keywords: Auditors; Auditing; Financial reporting

References

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