Eric Lohwasser, ’00

Does a firm’s internal control strength influence the timing of its preliminary earnings disclosure?

The earnings announcement of a firm is a crucial measure of its performance and one of its most influential disclosures; however, following the implementation of the Sarbanes Oxley Act of 2002 (SOX) most firms no longer wait for their audit to be completed before making this announcement. In my research, I examine how the strength of a company’s internal control environment, a key part of the SOX regulatory enactment that formalized companies internal reporting processes, influences this earnings announcement timing decision.

I proposed that internal control strength may be considered by management as a perceived substitute to the reliability provided by a more complete external audit, as it enables firms to make their disclosure in a timelier manner. I found evidence to support this and show that firms disclose their earnings earlier, relative to the audit’s completion, when their internal control environment is strong.

Results suggest that firms use their own financial reporting capability to meet market demand for timely information in a regulatory environment where the audit now takes longer to complete. Such evidence has implication for financial statement users and regulators to consider, given that unaudited earnings are now predominantly disclosed to the public with no explicit regulatory guidance to its timing, and there are conflicting views as to the disclosure’s expected reliability.