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Motivation

Voluntary Disclosure of Auditor’s Attestation on Internal Control: Evidence from China Fang Lou Qian Sun Rong Yang Hongqi Yuan. Motivation. Many studies on IC disclosure Market reactions to the disclosure of IC weaknesses ( Mammersley et al. 2008; Zhang 2007)

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Motivation

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  1. Voluntary Disclosure of Auditor’s Attestation on Internal Control: Evidence from ChinaFang LouQian SunRong YangHongqi Yuan

  2. Motivation • Many studies on IC disclosure • Market reactions to the disclosure of IC weaknesses (Mammersley et al. 2008; Zhang 2007) • Impact of IC disclosure on the cost of capital (Ashbaugh-Skaife et al. 2007; Beneish et al. 2008) • Risk factors associated with presence of IC problems (Ge and Mcvay 2005; Doyle et al. 2007) • Not many on the incentives for IC disclosure • Mandatory vs. voluntary IC disclosure • Two exceptions: Bronson et al. (2006) and Deumes and Knechel (2008) address voluntary IC disclosure • Identification problem

  3. Our Contributions • We examine not only why firms would choose voluntarily to disclose their IC self-assessment reports, but also why some of these firms prefer, in addition, to have an auditor’s attestation on these reports • We use the voluntary disclosure data from SSE during 2006-2010 • The uniqueness of the data • We put forward the equity capital refinancing hypothesis • We can address the identification problem to a certain extent

  4. Theoretical Framework • Healy and Palepu (2001) • The main purpose for voluntary disclosure of IC reports is to reduce information asymmetry and agency costs • Similarly, we argue having an auditor’s attestation on the IC report can make it more convincing, and thus further reduce information asymmetry and agency costs • Costs and benefits of IC disclosure and the associated auditor’s attestation

  5. The determinants for IC disclosure • Bronson et al. (2006) and Deumes and Knechel (2008): • Size • Leverage • Institutional Ownership • Growth • ROE • Alternative governance mechanism

  6. Our Hypotheses • H1a: Ceteris paribus, firms controlled by the government are more likely to issue IC self-assessment reports and to attain an auditor’s attestation. • H1b:Ceteris paribus, firms controlled by the central government are more likely to issue IC self-assessment reports and to attain an auditor’s attestation than those controlled by local governments. • H2: Ceteris paribus, firms having more mutual fund shareholdings are more likely to disclose self-assessment on IC and to have an auditor’s attestation.

  7. Our Hypotheses • H3a: Ceteris paribus, firms having equity-refinancing intentions are more likely to issue IC self -assessment reports and to have an auditor’s attestation on the IC report. • H3b: When planning to have equity-refinancing in the market, non-government-controlled firms are more likely to issue IC self-assessment reports and to have an auditor’s attestation on the IC report than government-controlled firms.

  8. Research Design • Since there are a few possible choices for a firm’s disclosure decision over time, we use three pooled Logit regression models to test our hypotheses regarding Chinese firms’ voluntary disclosure of IC self-assessment reports and attaining an auditor’s attestation. The baseline model is specified as follow: • Logit (ICVDit) = a0 + α1SEOit+ α2FUNDit +α3GOVit + α4CENTRAL* GOVit + a5SEOit* GOVit+ a6SIZEit + α7GROWit+ α8ROEit + α9LEVit + α10 INDIRit+ α11CLISTit + α12BIG4it + α13INVit+ α14AGEit + α15IndMBR +YRDummies + εit(1)

  9. Research Design • In Model 1, we set ICVDit to 1 if firm i discloses its IC self-assessment report at year t no matter whether there is an auditor’s attestation attained or not, and zero otherwise. This is to examine the likelihood to disclose IC self-assessment versus not to disclose. • In Model 2, we first exclude all firms that do not disclose an IC self-assessment report in year t, then set ICVDitto 1 if firm i attains an auditor’s attestation to its IC self-assessment report, and zero otherwise. This is to examine the likelihood to attain an auditor’s attestation among disclosers.

  10. Research Design • In Model 3, we define a Multinomial Logit variable, MLogit (ICVDit). Instead of being binary, it is categorized into three groups: ICVD0 represents firms with no IC self-assessment report at all, which serves as the benchmark; ICVD1 represents firms with an IC self-assessment report only; and ICVD2 represents firms with both an IC self-assessment report and an auditor’s attestation. • Since ICVD0 is used as the benchmark, we replace ICVD with ICVD1 and set it equal to 1 if firm i is in the category of ICVD1 in year t, and zero otherwise. Similarly, we replace ICVD with ICVD2 and set it equal to 1 if firm i is in the category of ICVD2 in year t, and zero otherwise.

  11. Research Design • The dependent variable, Logit(ICVDit), measures the likelihood of firm i having ICVD1 and ICVD2 in year t. Hence, there are two simultaneously estimated equations in the Multinomial Logit regression model: • one examines whether a firm discloses its IC self-assessment report only without attaining an auditor’s attestation • the other examines whether a firm has both a self-assessment disclosure and an auditor’s attestation

  12. Table 1 Sample Distribution

  13. Table 2 Description of Variables

  14. Table 3 Descriptive Statistics for Independent Variables • Panel A: Descriptive statistics for full sample during the period of 2006-10 • Panel B: Descriptive statistics of test variables for firms with IC weakness during the period of 2009-10 a SIZE in Table 2 (both panels A and B) is the total assets (in million RMB) at year-end.

  15. Table 4 Pearson Correlation Matrix This presents the Pearson correlation coefficients between all independent variables defined in Table 2. The bold number represents that two-tailed p-value is significant at the 10% level or better.

  16. Table 5 Multinomial Regression Results for 2006-2010

  17. Table 6 Multinomial Regressions Results for 2009-2010

  18. Table 7 Multinomial Regressions Results for Firms with IC Weaknesses (2009-10)

  19. Robustness Check • Use SEO scale in place of SEO dummy • Poor credibility as an incentive to have an audit attestation on IC report • Previous penalty by CSRC or SSE • Non-clean auditor opinion • Lead-lag relationship between Fund and Disclosure

  20. Conclusion • We hypothesize and find supporting evidence that a firm with the government, especially the central government, as its largest shareholder, with more mutual fund shareholdings, and with an equity refinancing plan in the near future, is more likely to disclose an IC self-assessment report and to attain an auditor’s attestation on the report. • We have also addressed the identification issue to a certain extent.

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