The audits of companies’ internal controls mandated by the Sarbanes-Oxley Act are good predictors of financial fraud, according to a new study.
The study, by professors Matthew Ege of Texas A&M University and Dain C. Donelson and John M. McInnis of the University of Texas at Austin, found the incidence of fraud disclosures at companies previously found by auditors to have material weaknesses in their internal controls is approximately 80 to 90 percent greater than companies on average, depending on how it was measured. Of the 127 fraud cases identified by the study, 36 of them, or nearly 30 percent, occurred after auditor reports of material weakness in internal controls. The study appears in the August/October issue of Auditing: A Journal of Practice & Theory, a quarterly published by the American Accounting Association.
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