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Introduction
The present study examines the association between corporate governance attributes and the remediation of internal control material weaknesses (henceforth ICMW) in financial reporting for a group of firms that disclosed ICMW for the first time in the fiscal years 2004, 2005 and 2006 pursuant to Section 404 of the Sarbanes-Oxley Act (SOX), 2002[1] . Remediation of internal control weakness is a critical factor for investors' risk assessment, as [2] Ashbaugh-Skaife et al. (2009) show that firms with effective internal control or firms that remediate previously reported internal control deficiencies (ICDs) are rewarded with a significantly lower cost of equity. The present study is a part of a large and well-diversified literature on corporate governance and financial reporting quality. An effective internal control imposed by active governance mechanism can mitigate the adverse effect of agency problems on reported accounting numbers because internal controls are designed to provide reasonable assurance about the reliability of reported financial information in accordance with Generally Accepted Accounting Principles (Public Company Accounting Oversight Board ([35] PCAOB, 2004)). [26] Kinney and McDaniel (1989) suggest that weak internal controls can increase the probability of material errors in accounting disclosures. [4], [3] Ashbaugh-Skaife et al. (2007, 2008) and [9] Doyle et al. (2007) document that weak internal controls lead to low-quality accounting accruals from intentional misstatements and unintentional accounting errors. [3] Ashbaugh-Skaife et al. (2008) further observe that firms that subsequently remediate their control problems exhibit an increase in accrual quality.
Prior studies also show that several firm-specific factors are responsible for control weaknesses. [9] Doyle et al. (2007) document that firms disclosing ICMW tend to be smaller, financially weaker, more complex, growing rapidly or undergoing restructurings. [4] Ashbaugh-Skaife et al. (2007) document that relative to the non-disclosing firms, firms disclosing control deficiencies have more complex operations, are more often engaged in acquisitions and restructurings, have greater accounting procedure application risk, experience more auditor resignations and have fewer resources available for internal control. [4] Ashbaugh-Skaife et al. (2007) further observe that disclosing firms have more prior Securities Exchange Commission (SEC) enforcement actions and financial restatements, are more likely to use a dominant auditor and have more concentrated institutional ownership. Their results suggest that a firm's governance characteristics in the form of higher quality...