Auditors seem to be caught between a rock and hard place—getting grief from regulators if they don’t flag internal control weaknesses but suffering setbacks in the marketplace if they do.
A new academic study presented to the American Accounting Association out of the University of Arkansas finds auditors who flag material weaknesses in internal control get penalized by the market. Auditors who issue a material weakness finding with respect to a company’s internal controls “are perceived as less attractive in the audit market,” say co-authors Stephen Rowe and Elizabeth Cowle, which “disincentivizes auditors from disclosing internal-control information that could make their clients look bad.”
