SOX 404(b) Compliance and the 2020 Amendment to the SEC’s Accelerated Filer Definitions

47 Pages Posted: 17 Jul 2019 Last revised: 27 Dec 2021

See all articles by Jennifer McCallen

Jennifer McCallen

University of Georgia - J.M. Tull School of Accounting

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Jonathan E. Shipman

University of Arkansas

Robert Lowell Whited

North Carolina State University

Date Written: December 20, 2021

Abstract

In 2020, the Securities and Exchange Commission exempted issuers with less than $100 million in annual revenue from the SOX Section 404(b) internal control audit requirement. We consider the implications of this change in two ways. First, we use a pre-amendment sample of issuers that would be exempt under the new rule to examine the effects of internal control audits on audit fees, internal control quality, internal control report quality, and financial reporting quality for such issuers. Using a fuzzy regression discontinuity design, we estimate that issuers with 404(b) audits in our sample pay 73 percent higher audit fees than exempt issuers. However, we find little evidence that internal control audits improve internal control reporting quality or financial reporting quality. Second, we use a post-amendment sample to evaluate issuer responses to the expanded compliance exemption. We find that 92.1 percent of newly exempted issuers opt not to voluntarily obtain an internal control audit. In fact, we observe low levels of voluntary compliance even within the subsample of issuers that received a 404(b) audit in the prior year, as 85.7 percent of these issuers dropped their audit of internal controls over financial reporting upon availability of the exemption. Together, our findings provide support for the SEC’s decision to exempt low-revenue issuers from the requirements of 404(b).

Keywords: SOX Section 404(b), Internal Control Audits, Compliance Costs, Compliance Benefits

Suggested Citation

McCallen, Jennifer and Schmardebeck, Roy and Shipman, Jonathan E. and Whited, Robert Lowell, SOX 404(b) Compliance and the 2020 Amendment to the SEC’s Accelerated Filer Definitions (December 20, 2021). Available at SSRN: https://ssrn.com/abstract=3420787 or http://dx.doi.org/10.2139/ssrn.3420787

Jennifer McCallen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Robert Lowell Whited (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695
United States

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