Characteristics of Auditors Reporting Material Weaknesses in Internal Control over Compliance for Federal Grants Julie C. Hyde, Ph.D., CPA

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

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

Over $645 billion Federal grant outlays to state and local governments for fiscal year 2011 Budget of the United States Government, Fiscal Year 2011 Not including awards to non-profits Ex. Private colleges

Motivation Interest to county administrators, grantor agencies, and auditors Increased understanding of internal controls for federal grants Addition to material weakness literature

Prior Research Jakubowski (1995) examines material weaknesses in compliance after Single Audit Act of 1984 and finds: More weaknesses for counties than cities Government auditors report more weaknesses Also, Brown and Raghunandan (1995) Lopez and Peters (2010) find large CPA firms are more likely to report material weaknesses. 6

Hypotheses Material Weakness Reported Auditor characteristics associated with reported material weaknesses: PCAOB Registered Material Weakness Reported AICPA GAQC F/S Weakness New Auditor

Sample Selection Federal Audit Clearinghouse 4,560 counties with 459 material weaknesses in internal control over compliance 2006 (153 MW of 1,555) 2007 (165 MW of 1,534) 2008 (141 MW of 1,471) Electronic sources 8

Material weakness is a f(x): PCAOB registration Firm membership with AICPA Governmental Audit Quality Center Material weakness on the financial statements Initial auditor Government auditor High-risk auditee Size of federal expenditures Number of firm’s county audit clients Client risk portfolio Material weakness reported in prior year Year

Univariate Statistics

Logistic Regression Results

Logistic Regression Results Partitioning of Counties by Total Federal Expenditure Mean Amounts

Conclusions Contribution to the  body of literature related to auditor changes and reported internal control weaknesses (Ashbaugh-Skaife et al. 2007; Zhang et al. 2007) and adds a governmental setting. Relation between material weaknesses on both internal controls over financial statements and over compliance for federal grants 

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

Future Research Include entity types such as municipalities, school districts, universities, and nonprofit organizations Longer time frame 15

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Descriptive Statistics (n = 4,560)