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1、AccountingHorizonsVol.19,No.3September2005pp.137158TheDisclosureofMaterialWeaknessesinInternalControlaftertheSarbanes-OxleyActWeiliGeandSarahMcVaySYNOPSIS:Thispaperfocusesonasampleof261companiesthatdisclosedatleastonematerialweaknessininternalcontrolintheirSE
2、CfilingsaftertheeffectivedateoftheSarbanes-OxleyActof2002.Basedonthedescriptivematerialweaknessdisclo-suresprovidedbymanagement,wefindthatpoorinternalcontrolisusuallyrelatedtoaninsufficientcommitmentofresourcesforaccountingcontrols.Materialweaknessesininternalco
3、ntroltendtoberelatedtodeficientrevenue-recognitionpolicies,lackofsegregationofduties,deficienciesintheperiod-endreportingprocessandaccountingpolicies,andinappropriateaccountreconciliation.Themostcommonaccount-specificmaterialweaknessesoccurinthecurrentaccrualacc
4、ounts,suchastheaccountsre-ceivableandinventoryaccounts.Materialweaknessdisclosuresbymanagementalsofrequentlydescribeinternalcontrolproblemsincomplexaccounts,suchasthederiv-ativeandincometaxaccounts.Inourstatisticalanalysis,wefindthatdisclosingamaterialweakness
5、ispositivelyassociatedwithbusinesscomplexity(e.g.,multipleseg-mentsandforeigncurrency),negativelyassociatedwithfirmsize(e.g.,marketcapital-ization),andnegativelyassociatedwithfirmprofitability(e.g.,returnonassets).Keywords:internalcontrol;materialweakness;Sarban
6、es-Oxley.DataAvailability:Dataareavailablefromsourcesidentifiedinthetext.INTRODUCTIONheSarbanes-OxleyAct(SOX)of2002requirestheimplementationofmanynewTrulesandprocedures.OneelementofSOX,concentratedinSections302and404,relatestotheinternalcontroloverfinancialrepo
7、rting.Essentially,SOXrequirestopWeiliGeisaPh.D.studentattheUniversityofMichiganandSarahMcVayisanAssistantProfessoratNewYorkUniversity.WebeganthispaperwhileWeiliGewasaNationalOfficeResearchInternwithPricewaterhouseCoopers.Thispaperhasbenefitedsubstantiallyfromth
8、ecommentsoftwoanonymousreviewersandJosephCarcello(AssociateEditor).WegivespecialthankstoGeneImhoffforhisdetailedcommentsandsuggestions.WealsothankRaymondBeier,ErinCampbell,JamesDArecca,Pa
