How Readable are SOX 404 Reports? An Application of Textual Analysis
42 Pages Posted: 15 Jan 2016
Date Written: January 14, 2016
This study examines all SOX 404 reports issued between 2004 and 2014 to determine their readability as measured by the FOG index after controlling for report size. We find that managements' reports are more readable than auditors' reports. Big 6 reports are less readable than non-Big 6 reports. Among the Big 4 firms, two firms issued significantly more readable reports than the others. The readability of managements' reports decreased after Auditing Standard (AS) No. 5 (PCAOB 2007) was issued whereas the readability of auditors' reports did not change. Reports containing three or more weaknesses (implying entity level control weaknesses) are significantly more readable than other reports.
Keywords: SOX 404 auditor's reports; SOX 404 management's reports; readability; FOG Index; internal control weaknesses
Suggested Citation: Suggested Citation