THE IMPACT OF MATERIAL WEAKNESS PRESENTATION STRUCTURE AND INTERNAL CONTROL TERMINOLOGY ON INVESTOR PERCEPTIONS

Management is required to disclose any material weaknesses discovered during its evaluation to prepare the company’s financial statements in their internal control over financial reporting (ICFR) report. Across two experiments, I examine the impact of two presentation characteristics of a material weakness made up of multiple, smaller problems— (1) the structure of the presentation of the material weakness, which is whether the material weakness is identified first, followed by descriptions of its individual parts (Top Down structure) or vice versa (Bottom Up structure) and (2) whether or not the parts of the weakness are labeled with ICFR terminology (“significant deficiencies” vs. “issues”). In my first experiment I find evidence that presenting the material weakness last, in comparison to presenting the material weakness first, increases the perceived number of distinct problems that investors perceive in a company’s ICFR, but I ultimately do not find that this structure significantly impacts investors’ perceptions of investment desirability. In my second experiment, I specifically examine how using (versus not using) ICFR terminology to identify the parts of the material weakness impact investors’ perceptions of the severity of the material weakness and how the presentation structure moderates that relationship. I find that using ICFR terminology increases the perceived overall severity of the weakness, although the effect of presentation structure is insignificant. I also find that using ICFR terminology negatively affects the investment desirability of a company through two separate paths—ICFR terminology increases (1) the perceived number of distinct problems in ICFR and (2) the perceived severity of the individual parts of the material weakness. Both of these paths increase the perceived severity of the material weakness, which then decreases investment desirability. Lastly, providing a definition for the ICFR terminology (i.e., an explanation that “significant deficiencies” are relatively less severe deficiencies than material weaknesses) does not impact the effect of ICFR terminology on perceptions of weakness severity

Crude by Rail in Benicia, California

The State of California is experiencing a surge in Crude by Rail (CBR) operations due to the increased production and shipment of two unconventional crudes, Bakken crude and Canadian tar sands oil (bitumen). However, emergency response agencies are not yet fully prepared to handle the unique hazards and risks associated with a CBR oil spill which is contributing to the public’s perception of risk towards CBR operations. Utilizing literature primarily on CBR operations, safety and emergency response, stakeholder engagement and risk perception, this study will examine the proposed Valero Crude by Rail Project in Benicia, CA, the public’s perception of risk towards the project, and the influence contingency planning and emergency response plans have on the public’s perceived risk. Data will be collected from a cross-section of the public through surveys, submitted written public comments regarding the project, and key informant interviews, with results potentially benefiting future CBR project managers and participants who want to better understand the relationship between the public’s perception of risk and emergency response plans

Crude by Rail in Benicia, California

The State of California is experiencing a surge in Crude by Rail (CBR) operations due to the increased production and shipment of two unconventional crudes, Bakken crude and Canadian tar sands oil (bitumen). However, emergency response agencies are not yet fully prepared to handle the unique hazards and risks associated with a CBR oil spill which is contributing to the public’s perception of risk towards CBR operations. Utilizing literature primarily on CBR operations, safety and emergency response, stakeholder engagement and risk perception, this study will examine the proposed Valero Crude by Rail Project in Benicia, CA, the public’s perception of risk towards the project, and the influence contingency planning and emergency response plans have on the public’s perceived risk. Data will be collected from a cross-section of the public through surveys, submitted written public comments regarding the project, and key informant interviews, with results potentially benefiting future CBR project managers and participants who want to better understand the relationship between the public’s perception of risk and emergency response plans

Chess with Pigeons

In a time of Global Pandemic, massive social justice demonstrations, and concerning political shifts, reality feels inaccessible and at times even unreal. With quarantine and social distance as the new norm, our human connections are abstract and digitized. My thesis will be a collection of short fiction that seeks to employ methods of the speculative genre and alternative narrative structure to explore our shifting understanding of humanity and connectedness. The introduction to this collection will lay out the process through which speculative realities better define our own

The impact of tone management on investor judgments: evidence from ICFR reports

Purpose In preparing company financial statements, management is required to evaluate internal controls and disclose any material weaknesses in the internal control over financial reporting (ICFR) report. This study aims to examine how the tone of the details management provides to describe a material weakness in its ICFR report impacts investors’ perceptions of the severity of the material weakness and the desirability of the company as a potential investment. Design/methodology/approach This study uses an experimental design that manipulates whether the company’s ICFR report includes a negatively-toned detail to describe a material weakness disclosed in the report. Participants read the report and answer questions concerning their perceptions of the desirability of the company as an investment and the severity of the material weakness. Findings This study finds that using negatively-toned details to describe a material weakness, as opposed to an absence of those details, decreases investment desirability due to an increase in the perceived severity and number of distinct problems in ICFR. Originality/value This study extends prior research by showing that the tone of details used to describe a material weakness, not just the quantity of details, impacts investors’ decision-making. This study shows that management can carefully construct their ICFR report to avoid tone and potentially mitigate the negative effect of disclosing ineffective ICFR. </jats:sec