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Costs to Comply with SOX Section 404

Jagan Krishnan

Temple University - Department of Accounting

Dasaratha V. Rama

Florida International University (FIU)

Yinghong Zhang

University of Central Oklahoma

August 1, 2007

Auditing: A Journal of Practice & Theory, Vol. 27, No. 1, May 2008, pp. 169-186.

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.

Number of Pages in PDF File: 31

Keywords: SOX 404 Costs, Internal Control, Material Weaknesses

JEL Classification: G38, G34, M41, M49

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Date posted: February 15, 2008 ; Last revised: April 21, 2014

Suggested Citation

Krishnan, Jagan and Rama, Dasaratha V. 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: https://ssrn.com/abstract=1091902

Contact Information

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)
HOME PAGE: http://www.sbm.temple.edu/~krish/

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
Feedback to SSRN

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