Do SOX 404 Control Audits and Management Assessments Improve Overall Internal Control System Quality?

Posted: 9 Dec 2015

See all articles by Joseph H. Schroeder

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Marcy L. Shepardson

Indiana University - Kelley School of Business - Department of Accounting

Date Written: December 7, 2015

Abstract

We address whether SOX 404(b) internal control audits under two auditing standards regimes and SOX 404(a) management assessments are associated with improved internal control system quality, an important and largely unstudied potential benefit. In 2013, the PCAOB disclosed fifteen percent of inspected control audits were ineffective, suggesting the current control auditing standard may not be sufficient to induce implementation of high quality control systems. We use an indirect measure of internal control system quality – future unaudited accruals quality – to proxy for internal control quality because sustained internal control improvements should be exhibited in future quarterly financial reports unaltered by contemporaneous financial statement audits. We find internal control audits initially provided internal control quality benefits. After the 2007 auditing standards change, internal control quality deteriorated for ICFR audited versus unaudited firms. Finally, we find limited evidence that management assessments affect internal control quality. Results indicate recent PCAOB concerns may have merit.

Keywords: Internal control quality; SOX Section 404; Internal Control Audits; PCAOB Auditing Standard No. 5 (AS5)

Suggested Citation

Schroeder, Joseph H. and Shepardson, Marcy L., Do SOX 404 Control Audits and Management Assessments Improve Overall Internal Control System Quality? (December 7, 2015). Accounting Review, Vol. 91, No. 4, 2016 Forthcoming; Kelley School of Business Research Paper No. 16-1. Available at SSRN: https://ssrn.com/abstract=2700384

Joseph H. Schroeder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Marcy L. Shepardson

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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