Auditor Attestation Under SOX Section 404 and Earnings Informativeness

Posted: 11 Nov 2012

See all articles by Lucy Huajing Chen

Lucy Huajing Chen

Villanova University

Jayanthi Krishnan

Temple University - Department of Accounting

Heibatollah Sami

Lehigh University

Haiyan Zhou

University of Texas - Pan American

Date Written: November 9, 2012

Abstract

Section 404 of the Sarbanes-Oxley Act requires managers to assess, and their auditors to express an opinion on, the effectiveness of internal controls over financial reporting (ICFR). Policymakers expect the ICFR audits to enhance the credibility of firms’ financial statements. Prior research argues that audit characteristics that enhance the credibility of financial reporting are associated with stronger earnings-return associations. We examine whether earnings accompanied by the first-time Section 404 ICFR reports were associated with higher informativeness compared with earnings in the prior year when only financial statement audit reports were available. We conduct our analysis for a test sample of accelerated filers with clean ICFR reports and clean previous Section 302 disclosures. Using a difference-in-differences approach, we compare the change in earnings informativeness for the test sample with that for a control sample of non-accelerated filers. We find that earnings informativeness for companies with clean internal control reports was greater in the Section 404 adoption year than in the previous year, while there was no change in earnings informativeness for the non-accelerated filers. Also, there is no difference in the increase in earnings informativeness across firms with small and large compliance costs (measured by change in audit fees), suggesting that both groups benefited from the Section 404 ICFR audits.

Keywords: Internal Control, Earnings Informativeness, Sarbanes-Oxley, Section 404, Section 302

Suggested Citation

Chen, Lucy Huajing and Krishnan, Jayanthi and Sami, Heibatollah and Zhou, Haiyan, Auditor Attestation Under SOX Section 404 and Earnings Informativeness (November 9, 2012). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2173519

Lucy Huajing Chen

Villanova University ( email )

United States
610-519-6321 (Phone)

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

Haiyan Zhou

University of Texas - Pan American ( email )

1201 West University Drive
Edinburg, TX 78539
United States
956-381-3334 (Phone)
956-381-2407 (Fax)

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