Costs to Comply with SOX Section 404

31 Pages Posted: 15 Feb 2008 Last revised: 21 Apr 2014

See all articles by Jagan Krishnan

Jagan Krishnan

Temple University - Department of Accounting

Dasaratha V. Rama

Florida International University (FIU)

Yinghong Zhang

University of Central Oklahoma

Date Written: August 1, 2007


This study examines companies' costs to comply with SOX 404 and identifies factors that are associated with these costs. SOX 404 costs can be classified into three categories: internal labor costs, external consulting and technology expenses, and auditor attestation charges. While prior research has examined audit fees associated with SOX 404, we examine both total costs and auditor attestation costs associated with SOX 404. Based on a sample of companies that voluntarily disclosed SOX 404 cost information during the period from January 2003 to September 2005, we find that the mean (median) total compliance costs for Section 404 is $2.2 ($1.2) million. Regression analyses indicate that the total compliance costs are positively associated with firm size, the presence of material internal control weaknesses, the cost of setting up new computer systems and establishing formal internal control policies, the involvement of large auditors, and the appointment of new CEOs, and negatively associated with firms in regulated industries and firms that raised new financing. Firm size and the incidence of material weaknesses are also the drivers of SOX 404 audit costs, one component of total SOX 404 costs.

Keywords: SOX 404 Costs, Internal Control, Material Weaknesses

JEL Classification: G38, G34, M41, M49

Suggested Citation

Krishnan, Jagan and Rama, Dasaratha and Zhang, Yinghong, Costs to Comply with SOX Section 404 (August 1, 2007). Auditing: A Journal of Practice & Theory, Vol. 27, No. 1, May 2008, pp. 169-186., Available at SSRN:

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Dasaratha Rama

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Yinghong Zhang

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

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