New research published in The Accounting Review by Tony Bucaro, assistant professor of accountancy, finds that auditors accept more aggressive client reporting after they report a material weakness in internal control over financial reporting (ICFR) than after they report no material weakness.
Tony and his coauthors provide evidence licensing underlies this effect. In a second experiment, the efficacy of an intervention to reduce the identified licensing effects by prompting an audit quality goal is investigated. The coauthors find this prompt mitigates the unintended consequence when auditors report a material weakness. While regulators are concerned companies are undeservedly receiving clean ICFR audit opinions, the findings indicate adverse ICFR opinions may lead auditors to give companies undeservedly clean financial statement opinions. The research provides a potential remedy to this unintended consequence.