| Summary: | 碩士 === 國立政治大學 === 會計研究所 === 103 === Prior studies indicate that warranty reserves present two major aspects: a contingent liability and an information signal of growth prospects; in addition, managers use warranty accruals as an earnings management tool to meet earnings targets. In this paper, I hypothesize that SOX Section 404 internal control disclosures can help to isolate the information signal role of warranty reserves from others. The results reveal that while warranty reserves serve as an information signal for firms with effective internal controls, they are merely liabilities for firms with internal control weakness (ICW firms). Specifically, I find that internal control weakness has an adverse effect on the relation between abnormal warranty accruals and future firm performance; this effect is primarily driven by unintentional errors, as opposed to intentional misstatements. Moreover, investors give a less negative valuation of warranty reserves for firms with effective internal controls than for ICW firms. Further analysis shows that the negative effect is more pronounced when these weaknesses relate to sales and cost of goods sold. Overall, I document that internal control reports can be used to discriminate an information signal role from other roles served by warranty accruals.
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