The Valuation Effect and Motivations of Voluntary Compliance with Auditor's Attestation Under Sarbanes-Oxley Act Section 404 (B)

34 Pages Posted: 17 Jan 2012 Last revised: 13 Jan 2015

See all articles by Kareen Brown

Kareen Brown

Brock University

Parunchana Pacharn

Brock University

Jennifer Li

Brock University

Emad Mohammad

McMaster University - Accounting & Financial Management Services

Fayez A. Elayan

Brock University-Goodman School of Business

Feng Chu

Brock University

Date Written: January 15, 2012

Abstract

On November 4th 2009, non-accelerated filers have been permanently exempted from compliance with SOX Section 404(b) (404 (b)) which called for independent auditor attestation. While compliance with 404(b) had never been mandatory, a number of companies voluntarily comply with it despite the compliance costs and risks associated with ICW discovery. This study develops a signaling model to explain what motivates non-accelerated filers to voluntarily comply with 404(b); examines the valuation effect of the permanent exemption; and examines the determinants of the valuation effects in terms of signaling effect, quality of firms’ internal control over financial reporting (ICOFR) and liquidity enhancement.

We find evidence that auditor attestation serves as a signaling mechanism to certify firm quality of ICOFR; companies voluntarily submit to auditor’s attestation to signal their superior quality of ICOFR. This signal is credible because it’s costly, in terms of additional compliance costs and the risks of discovery of material weaknesses of internal control; companies that comply with 404(b) have lower bid-ask spread, less return volatility, followed by more analysts, more likely to be audited by Big4 auditing firms, higher liquidity, more effective internal control, and less restatements; market response to the announcement of permanent exemption is significantly negative and it’s more negative for non-compliance firms; cross-sectional and logistic regression reveals that voluntary compliance with 404(b) improves the quality of ICOFR, liquidity and signals firm superior quality.

Keywords: SOX 404 (b), compliance, audit attestation, internal control, signaling

JEL Classification: M14

Suggested Citation

Brown, Kareen and Pacharn, Parunchana and Li, Jingyu and Mohammad, Emad and Elayan, Fayez A. and Chu, Feng, The Valuation Effect and Motivations of Voluntary Compliance with Auditor's Attestation Under Sarbanes-Oxley Act Section 404 (B) (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=1985799 or http://dx.doi.org/10.2139/ssrn.1985799

Kareen Brown

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Parunchana Pacharn

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Jingyu Li

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Emad Mohammad

McMaster University - Accounting & Financial Management Services ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext. 27432 (Phone)
905-521-8995 (Fax)

Fayez A. Elayan (Contact Author)

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Feng Chu

Brock University ( email )

500 Glenridge Avenue
St. Catharines, Ontario L2S 3A1
Canada

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