Characteristics of Firms with Material Weaknesses in Internal Control: An Empirical Analysis

Abstract

The two million fake accounts opened by Wells Fargo employees have underscored the importance of internal controls in recent times. We examine a sample of 395 MWIC firms matched with a sample 395 control firms in the same industry. The univariate test results indicate that the MWIC firms have significantly lower gross margins and are smaller when compared to control firms. The logistic regression results indicate that the total assets turnover ratio, current ratio, audit opinion and the size measure are significantly different between the two groups. Tobin’s Q and capital intensity measures are marginally different between the two groups.