How not to communicate material and immaterial weaknesses in accounting controls;

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How Not to Communicate Material and Imma­terial
Weaknesses in Accounting Controls*
Wanda A. Wallace
The University of Rochester
In the Securities and Exchange Commission (SEC) "Statement on With­drawal
of Proposal to Require Reports on Internal Accounting Controls" (June 6, 1980) the SEC stated its desire that
... the action announced today will encourage further voluntary initiatives and permit public companies a maximum of flexibility in experimenting with various approaches to public reporting on internal accounting control (and) . . . auditor association with such statements, (p. H-1)
The Commission pointed out that the proposed Statement on Auditing Standards (SAS) on "Reporting on Internal Accounting Control" (issued December 31, 1979 and adopted as SAS 30 in 1980) provides a framework for such public reporting. However, while SAS 30 does outline the possible report forms related to internal accounting control which can be prepared by the CPA, including the necessity of disclosing material weaknesses and permission to disclose immaterial weaknesses, if desired, it does not provide any directions or illustrations of how these disclosures can be communicated in a meaningful form—particularly to the general public. While experimentation may be desirable as a means of improving disclosure practices, problems can be created for companies and auditors alike if the results of these experiments are misinterpreted.
This paper presents survey evidence which supports the likely diversity in financial statement users' interpretation of the effect of internal control points (possible disclosures of material or immaterial weaknesses) on report users' assessment of management. This evidence, as well as the ranking of the various possible report forms on internal accounting control which have been discussed in the literature, provide some direction as to the preferred form and content of future control disclosures. An analysis is given of the extent to which prior beliefs may have influenced survey responses with respect to
(1) Auditors' present responsibilities.
(2) The limitations of internal control and audit procedures.
* This paper is based on a research project which was funded by a grant from the Peat, Marwick,
Mitchell Foundation through its Research Opportunities in Auditing Program. The views
expressed herein are those of the author and do not necessarily reflect the views of the Peat,
Marwick, Mitchell Foundation.
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