Prior research finds that signals of remediation of internal control weaknesses do not guarantee that all weaknesses are fully resolved. However, why certain remediation strategies fail is unclear. This study examines how remediation timing and actions affect the likelihood of a failed remediation. I predict and find that the likelihood of a failed remediation is decreasing in both the time a company takes to remediate and in the extent of remediation actions employed. Importantly, this study documents that disclosures of material changes in internal control provide information useful in assessing the likelihood of a failed remediation, as well as evidence that prompt remediation does not necessarily result in a successful remediation. Moreover, I find that there are consequences to remediation failures in the form of a higher likelihood of management and board turnover. Finally, I find evidence that economic benefits of remediation found in prior research may be understated. This study can provide stakeholders with insights into how the nature, extent, and timing of a remediation strategy can reduce the likelihood of a failed remediation.

This study examines whether auditors' evaluation and reporting of firms' internal control over financial reporting (ICFR) affects firm operational efficiency. Prior research indicates that the strength of internal controls is positively associated with economic benefits. However, notwithstanding the underlying strength of controls, whether the mere presence of an ICFR audit provides similar economic benefits is unclear. We predict and find that small firms with ICFR audits have significantly higher overall operational efficiency than small firms with only management ICFR reports, even after controlling for underlying internal control strength. We find this effect manifests through improvements in inventory turnover and innovation, and through increased relative product market share. Separately, we find ICFR audits are associated with lower efficiency in SG&A expenses. Cross‐sectional analyses indicate that the mechanism by which ICFR audits affect overall operational efficiency is through auditor detection of internal control problems and through knowledge spillover from auditing other highly efficient firms in the audit office's metropolitan statistical area. These results provide additional evidence on the ongoing cost and benefit debate of ICFR audits for small firms.

Regulators have expressed concerns that an emphasis on non-audit services (NAS) could distract from the audit function, even for clients with minimal NAS purchases. Motivated by this concern, we examine whether a greater emphasis on providing NAS to audit clients generally (i.e., not to a specific client) can distract from the audit function, thus reducing audit quality. We find evidence of an NAS distraction effect, where a greater emphasis on NAS at the audit office-level results in more client financial statement restatements, even after controlling for client-specific NAS. Further, the association exists among clients that purchase minimal NAS, suggesting that this association relates to distraction effects in addition to independence issues examined in prior research. This study should be of interest to audit firms, audit committees, and regulators because it provides new evidence regarding issues related to a business model that includes both audit and non-audit services.