Title

Material Weaknesses in Internal Control over Compliance for Federal Grants to U.S. Counties

Document Type

Dissertation

Publication Date

5-2011

Abstract

Audits of internal control over compliance in accordance with the Office of Management and Budget Circular A-133 indicate the presence of material weaknesses. These weaknesses highlight breakdowns in internal control and create the opportunity for financial mismanagement and fraud. This study evaluates material weaknesses in internal control over compliance for U.S. counties. Material weaknesses are mapped into internal control elements, and the study examines both entity determinants and auditor characteristics associated with the reporting of material weaknesses. This three-paper dissertation contributes to the existing literature by shedding new light on material weaknesses reported during audits of federal grants.

The first paper classifies material weaknesses in internal control over compliance into the five components of the Committee of Sponsoring Organization‘s (COSO) internal control framework and by the 14 compliance requirements listed in Circular A-133. The second study investigates determinants of material weaknesses using the following county characteristics: size, financial health, complexity, and the presence of a material weakness in the financial statements. The third paper examines associations with the following auditor characteristics: PCAOB firm registration, voluntary membership with the AICPA‘s Governmental Audit Quality Center, the disclosure of a material weakness on the related financial statements, and initial-year auditors.

Results indicate that the majority of material weaknesses are classified as control activities. Empirical results indicate that financially weak, complex counties as well as counties with material weaknesses in financial statements are more likely to report material weaknesses in compliance. In addition, auditors who report material weaknesses in county financial statements are likely to report material weaknesses in internal control over compliance and are more likely to be first-year auditors.

The results of this study can benefit county managers, grantor agencies, and auditors as they review and evaluate the ability of current internal control systems to prevent and detect material errors or fraud. The results could also influence counties‘ auditor selection decisions and stimulate discussions for oversight agencies to encourage auditor rotations.

Peer Reviewed

1