Have the Costs of Sox Section 404(b) Changed Over Time? An Evaluation of the Internal and External Costs of Sox Section 404(b) Compliance

56 Pages Posted: 17 Jul 2019 Last revised: 29 Jul 2019

See all articles by Jenny McCallen

Jenny 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: March 1, 2019

Abstract

This paper uses regression discontinuity design (RDD) to estimate the evolution in the costs of Section 404(b) of the Sarbanes-Oxley Act (SOX) over time. Using regulatory compliance cutoffs as instruments in the “fuzzy” RDD, we estimate significant internal compliance costs (proxied for using adjusted selling, general, and administrative expenses) and external compliance cost premiums (proxied for using audit fees) associated with Section 404(b) compliance. While substantial in the initial years of compliance, we find that both the internal and external cost premiums declined significantly by 2009 and 2010. However, consistent with the PCAOB’s renewed emphasis on internal control audits beginning in 2010, we observe that the trend reversed and that both the estimated internal and external cost premiums returned to early SOX levels by 2015. Although we find some evidence that the increased internal costs resulted in more effective internal controls, we find no evidence that the internal controls over financial reporting (ICFR) audit yields more informative internal control reports. Together, our evidence suggests that Section 404(b) compliance costs have not materially and sustainably declined since inception and that these costs do not appear to be supported by more informed internal control reports.

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

Suggested Citation

McCallen, Jennifer and Schmardebeck, Roy and Shipman, Jonathan E. and Whited, Robert Lowell, Have the Costs of Sox Section 404(b) Changed Over Time? An Evaluation of the Internal and External Costs of Sox Section 404(b) Compliance (March 1, 2019). 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

Register to save articles to
your library

Register

Paper statistics

Downloads
42
Abstract Views
218
PlumX Metrics