SUMMARY: This study provides evidence on the nature of voluntary management re-ports on internal control (MRIC), and on the characteristics of firms issuing suchreports, before internal control reports were mandated under Section 404 of theSarbanes-Oxley Act. We examine the association between firm characteristics and thevoluntary inclusion of an MRIC in the firm’s annual report. Our analysis of 397 mid-sized firms in 1998 indicates that a voluntary MRIC is more likely for firms that arelarger, have an audit committee that meets more often, have a greater level of institu-tional ownership, and have more rapid income growth. We find that a voluntary MRICis less likely for companies with more rapid sales growth. Slightly more than one-thirdof our sample issues an MRIC. None of the voluntary MRICs mention any materialweaknesses; no reports include an auditor attestation; less than half (41 percent) ofthe reports include a statement that controls were effective; and only three of thesereports include the criteriawww.51lunwen.org used to assess control effectiveness.
Keywords: management reports on internal control; firm characteristics; corporate governance.
INTRODUCTION
INSTITUTIONAL BACKGROUND AND HYPOTHESES
Benefits and Costs Associated with MRICs
Form and Content of MRICs and Comparison with 404 Reports
Hypothesis Development
Firm Characteristics
RESEARCH DESIGN
SAMPLE
RESULTS