An Examination of Nonprofessional Investor Perceptions of Internal and External Auditor Assurance

Abstract

This study investigates whether assured disclosures of management's remediation of material weaknesses in internal controls affect positively unsophisticated investor perceptions of disclosure credibility and the likelihood of their investing in a firm. The results indicate that investors perceive assured material weakness remediation disclosures, whether the audit source is external or internal to the firm, to be more credible than unassured disclosures. Specifically, external assurance is seen to be more credible than the assurance provided by internal auditors but that is seen as more credible than no assurance. However, investment likelihood remains the same regardless of assurance source. Furthermore, the results indicate that investor disclosure credibility perceptions and investing likelihood are lower for internally assured pervasive material weakness remediation disclosures than internally assured account-specific remediations and all externally assured remediation disclosures. Finally, mediation results suggest that both internal and external auditor assurance increases investing likelihood indirectly through increased disclosure credibility.