The ICFR process: Perspectives of accounting executives at large public companies

The Sarbanes-Oxley Act charges management with the primary responsibility for internal control over financial reporting (ICFR). However, prior research tells us little about the ICFR process from management's perspective. We develop a theoretical model of the ICFR process from management's perspective and examine that model by surveying 145 and interviewing 35 accounting executives at large US public companies. Our primary finding is that executives feel constrained in their ability to direct ICFR and hold perspectives that reflect these constraints. Specifically, most executives feel compelled by auditors to follow the PCAOB's preferences even though executives believe these preferences often tend to distract management and auditors from riskier areas. Executives also believe that audit committees' involvement in ICFR is too passive and that auditors' assessments are sometimes too severe, prompting executives to push back on auditors. Overall, executives strive to make decisions that are optimal for their ICFR, but limited resources and other business conditions, such as restructuring events and lack of qualified personnel, limit the effectiveness of their ICFR efforts. We discuss the implications of our results for practitioners, regulators, and researchers.

Automated summary

The Sarbanes-Oxley Act assigns primary responsibility for internal control over financial reporting (ICFR) to management. However, little is known about the ICFR process from management's perspective. This study develops a theoretical model of the ICFR process from management's perspective and examines it through a survey and interviews with accounting executives. The findings reveal that executives feel constrained in directing ICFR due to auditors' preferences and believe that audit committees' involvement and auditors' assessments are sometimes inadequate.