How Informative are SOX 404 Reports?

AAA Annual Conference, August 2014

39 Pages Posted: 16 Jan 2014 Last revised: 18 Dec 2014

See all articles by J. Efrim Boritz

J. Efrim Boritz

University of Waterloo - School of Accounting and Finance

B. Louise Hayes

University of Guelph - Gordon S. Lang School of Business and Economics

Lev Timoshenko

University of Calgary - Haskayne School of Business

Date Written: January 31, 2014

Abstract

This study experimentally examines a random sample of 50 SOX 404 reports issued between 2004 and 2009 to determine their informativeness, as represented by their readability measured by the Fog index and understandability measured by coding errors. We hypothesize that there has been no change in informativeness over time, more experienced auditors will better comprehend SOX 404 reports, and that significant readers’ expertise is required to overcome lack of clarity in SOX 404 reports. The results indicate that the informativeness of longer reports decreased over time, which was mitigated by a decreased in their frequency. Interestingly, shorter reports are found to be more informative. Further, auditors’ understanding is affected by SOX 404 reports’ lack of readability and novices’ understanding is affected more than experts’ understanding. This finding implies that the investing public would be even more adversely affected, although we do not test this conjecture directly.

Keywords: Informativeness of SOX 404 reports; information technology control weaknesses; internal control weaknesses; content analysis; novice auditors; experienced auditors

Suggested Citation

Boritz, Efrim and Hayes, B. Louise and Timoshenko, Lev, How Informative are SOX 404 Reports? (January 31, 2014). AAA Annual Conference, August 2014. Available at SSRN: https://ssrn.com/abstract=2379415 or http://dx.doi.org/10.2139/ssrn.2379415

Efrim Boritz (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada
519-888-4567 (Phone)
519-888-7562 (Fax)

B. Louise Hayes

University of Guelph - Gordon S. Lang School of Business and Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

Lev Timoshenko

University of Calgary - Haskayne School of Business ( email )

2500 University Dr NW
Calgary, Alberta T2N 1N4
Canada

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