Differential Sox Regulation Regimes and ICFR Disclosure Quality

Abstract

Although prior studies indicate that compliance with Section 404 of SOX, which requires both high-effort management disclosure and internal control audit, is costly, no consistent conclusion can be drawn from prior research that Section 404 can improve the disclosure quality of internal control over financial reporting (ICFR). By analyzing incremental and joint implementation of multiple SOX-based ICFR disclosure and internal control audit mandates, we examine the differential effects of alternative ICFR regulations on the quality of ICFR related public disclosure. Our results reveal that companies subject to full Section 404 issue higher-quality internal control reports than those subject to Section 302 or Section 404(a) only. However, we find no supporting evidence that companies subject to Section 404(a) issue better quality internal control reports than those subject to Section 302 only. This study provides evidence for policymakers to assess the effectiveness of internal control reporting regulations in the future.

Keywords: SOX regulation, quality of internal control disclosure, internal control audit, restatement