In a recent article by Joseph F. Brazel, Matthew Starliper, and Yao Yu, published in Accounting Horizons, the authors investigate how management’s communication style when disclosing material weaknesses in internal control affects investor perceptions. Under Section 404 of the Sarbanes-Oxley Act, management must disclose the effectiveness of their internal controls over financial reporting, but how they communicate this information can make a big difference.
The study reveals that many firms tend to adopt a defensive tone, often using first-person pronouns and a “reasonable assurance” argument to explain the material weaknesses in their control systems. However, an experiment conducted by the authors shows that investors are more willing to invest in a company when management uses a less defensive tone, avoiding personal language and presenting information more transparently. This suggests that companies should carefully consider their communication style to maintain investor confidence.
To read the full article, visit Accounting Horizons.