Management's Communication Style when Disclosing Material Weaknesses in Internal Control
Author | : Joseph F. Brazel |
Publisher | : |
Total Pages | : 0 |
Release | : 2023 |
ISBN-10 | : OCLC:1378824043 |
ISBN-13 | : |
Rating | : 4/5 (43 Downloads) |
Download or read book Management's Communication Style when Disclosing Material Weaknesses in Internal Control written by Joseph F. Brazel and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Section 404 of the Sarbanes-Oxley Act requires management to assess and disclose the effectiveness of their internal controls over financial reporting (ICFR). However, the regulation does not provide specific guidance regarding the communication style to be used in these reports. Our analysis of 200 actual ICFR reports disclosing material weaknesses in internal control reveals great variations in terms of 1) whether management uses a more defensive tone in the “reasonable assurance” argument and 2) whether management uses first-person pronouns (e.g., we, us, our). We observe that the most common communication style in our sample is a defensive tone combined with the use of first-person pronouns. In an experiment where we vary management's communication style with respect to material weakness disclosures, we find that nonprofessional investors are more willing to invest in a company when management takes a less defensive tone and does not use first-person pronouns. Our findings show a sharp contrast between the communication styles management chooses to use in actual ICFR reports and what we observe experimentally to be the most effective style. These findings have implications for management in terms of improving their communication effectiveness with investors.