Title: The impact of internal control weaknesses on pension assumptions manipulation

Authors: Seokyoun Hwang; Bharat Sarath

Addresses: Department of Accounting and Finance, School of Business, The City University of New York, College of Staten Island, 10314, USA ' Department of Accounting and Information Systems, Rutgers Business School, Rutgers University, 08854, USA

Abstract: This study examines the effect of internal control weaknesses (ICWs) on managers' choices of pension assumptions, using data disclosed under Sarbanes-Oxley Act Section 404 from 2004 to 2012. We hypothesise that firms with ICWs are better able to opportunistically set pension assumptions, such as the expected rate of return (ERR) and the discount rate (DR), which in turn helps to report higher earnings or healthier balance sheets. First, we find that firms with ICWs tend to report higher ERR and DR than non-ICWs firms. Particularly, the use of higher DR by ICW firms is heightened under FAS 158 which requires the funding status of plans to be reported on the balance sheets. Next, we find that the effect of ICWs on pension assumptions is much stronger when managers have greater incentives to report high profits. Finally, we find that remediation of ICWs reduces the bias in assumed ERR for smaller plans.

Keywords: pension assumption; pension accounting; ICWs; internal control weaknesses; discount rate; ERR; expected rate of return; earnings management; pension assumption manipulation; pension estimates.

DOI: 10.1504/IJAAPE.2020.112730

International Journal of Accounting, Auditing and Performance Evaluation, 2020 Vol.16 No.2/3, pp.271 - 305

Accepted: 08 Jul 2020
Published online: 01 Feb 2021 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article