Investor Perceptions of Auditor Reports Under Section 404 of the Sarbanes-Oxley Act
Posted: 25 Sep 2007
Date Written: 2007
Section 404 of the Sarbanes-Oxley Act requires firms to assess the effectiveness of internal controls over financial reporting and auditors to express an opinion on the effectiveness of such internal controls. We examine whether the first-time inclusion of additional audited information in Section 404 company filings were associated with higher earnings response coefficients (ERC) for accelerated filers. We find that the ERCs of companies with clean internal control reports were greater in the SOX 404 year of adoption than in the previous year. However, there is no difference in the ERCs in the two years for companies with material weaknesses. We interpret these results as indicating that even clean Section 404 reports - which form a majority of all internal control reports - contribute positively to investor perceptions about the quality of financial reporting.
Keywords: Internal Control, Earnings Response Coefficient, Section 404, Sarbanes-Oxley, Accelerated Filer
JEL Classification: G14, G34, G38, M41, M49
Suggested Citation: Suggested Citation