The effect of management and auditor reports on internal control on financial analysts' perceptions and decisions

In recent years, management and auditor reporting on internal control has been considered by the Securities and Exchange Commission and by numerous private sector organizations as a means to improve the reliability of financial statements. This study provides empirical evidence concerning whether such reports achieve this objective.; The study involved an experiment that examined whether management and auditor reports on internal control affected financial analysts' perceptions and decisions associated with measures of financial statement reliability. The independent variables in the study were the type of report on internal control issued (a management assertion issued in compliance with the COSO guidelines, an unqualified attestation opinion issued in compliance with the current attestation standards, and a report issued by the auditor that reports directly on internal control rather than on management's assertion) and the reporting threshold used (material weakness and reportable condition).; The methodology involved mailing case studies to the financial analysts. The case studies provided financial statements and the related notes; the auditor's unqualified report on the financial statements; and a brief summary of the industry, company, and lines of business for a hypothetical company. All information was held constant except for the presence of or version of the report on internal control The analysts provided their perceptions of the reliability of the company's financial statements, the effectiveness of internal control over financial reporting, the credit risk associated with a new bond issue of the company, and their decision to recommend the bond issue as a buy, sell, or hold to a portfolio manager. A multivariate analysis of variance (MANOVA) and analysis of variance (ANOVA) were the statistical tests used to analyze the relationships between the independent and dependent variables.; The results of the study indicated that all versions of the auditor's report on internal control significantly affected the respondents' perceptions about the reliability of financial statements and the effectiveness of internal control. Management reports on internal control, however, did not affect these perceptions. The results also indicated that neither management nor auditor reports on internal control affected perceptions of credit risk or the buy, sell, or hold recommendation.