Determinants of Material Weaknesses in Internal Control over Compliance in Accordance with OMB Circular A-133 for U.S. Counties Julie C. Hyde, Ph.D., CPA

Overview Research Question Motivation Literature Review Hypotheses Sample and Empirical Results Conclusions

Research Question What entity characteristics are associated with the reporting of a material weakness in internal control over compliance for federal grants?

Motivation Interest to county administrators, grantor agencies, and auditors Increased understanding of internal controls for federal grants Addition to material weakness literature (Boyle et al. 2004; Ge and McVay 2005; Klamm and Wilson 2009)

Prior Research Companies with MW are small, complex, and financially weak. – Doyle et al. (2007); Ashbaugh-Skaife et al. (2007); Ge and McVay (2005)

Hypotheses County characteristics associated with material weaknesses Material Weakness County Size Financial Health Complexity MW on F/S

Sample Selection Federal Audit Clearinghouse – 159 counties with material weaknesses in internal control over compliance in 2007 – Matched control group (159) – Hand collection of county financial reports

Material weakness is a f(x): County size Financial health Complexity Material weakness on the financial statements Change in federal expenditures from 2006 to 2007 Material weakness reported in prior year

Descriptive Statistics (n = 318)

Univariate Statistics

Logistic Regression Results

Logistic Regression Results: Model for COSO categories

Conclusions Like SEC companies, counties with complex operations and poor financial health are more likely to report material weaknesses (Doyle et al. 2007; Ge and McVay 2005; Bryan and Lilien 2005). Relation between material weaknesses on both internal controls over financial statements and over compliance for federal grants Unlike SEC companies, no relation between size and material weaknesses could result because grants are administered by departments, not the entity-wide control system.

Implications From a single audit perspective, size does not present additional risks for MWs. Grantor agencies could evaluate financially weak and complex counties as having increased likelihood of MWs in awarding grants or determining monitoring activities. Auditors may adjust risk assessments using the results of this study.

Limitations Generalizability of results Time frame Instances where material weaknesses in internal controls over compliance were present but were unreported

Future Research Include entity types such as municipalities, school districts, universities, and nonprofit organizations Longer time frame Determinants of material weaknesses over financial reporting

Questions and Comments