Company Complexity Of Ge And Mcvay - 2135 Words

Company Complexity According to Ge and McVay research study findings, business complexity is positively correlated with firm disclosure of material weaknesses. They hypothesized that the â€Å"firms with more complicated transactions likely to have greater chance for a disconnect in the financial reporting process, and thus a material weakness (Ge et al., 148).† To measure business complexity, Ge and McVay used the number of operating segments reported in the annual 10-K and the existence of foreign currency exchange translation. Ge and McVay had two subgroups within their study: firms that disclosed material weaknesses and a control group of 2003 Compustat firms who did not report any material weaknesses. The Ge and McVay study proved their†¦show more content†¦In comparison to Doyle et al. study, Doyle and his colleagues hypothesized that the â€Å"complexity of the firm is a driver of internal control weaknesses (Doyle et al., 9).† To measure the business complexity of a firm, Doyle et al. used three measures to include the number of special purpose entities, number of operating segments and the existence of foreign currency adjustment. The findings of Doyle et al. were as predicted. The three complexity measures were higher in firms that reported material weaknesses in comparison to the 2003 Compustat firms, who did not report any material weaknesses. This indicates that company complexity is positively correlated to the disclosure of material misstatements. Company Profitability In relation to the Ge and McVay research study findings, company profitability is negatively correlated with firm disclosure of material weaknesses. Ge and McVay hypothesized that â€Å"poorly performing firms simply might not be able to adequately invest in proper internal controls (Ge et al., 151).† This would result in a greater chance of disclosing material weaknesses. In order to test their hypothesis, they used two profitability metrics consisting of return on assets (ROA) and cash from operations scaled by assets (CFO/A). In reference to the Ge and McVay research findings, as presented in Figure B1 , material weakness firms had lower ROA and CFO/A compared to the control group of 2003 Compustat firms (excluding material