Evidence on the 2020 Exemption of Low-Revenue Issuers from the Internal Control Audit Requirement

47 Pages Posted: 17 Jul 2019 Last revised: 1 Jun 2022

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: May 30, 2022

Abstract

We consider the implications of the 2020 amendment to the accelerated filer definition which exempts issuers with less than $100 million in annual revenue from the internal control audit requirement. We find that the majority (92.7 percent) of affected issuers took advantage of the exemption, suggesting that issuers perceive the costs of an internal control audit to outweigh the benefits. To evaluate the potential consequences of the expanded exemption, we examine a pre-amendment sample of issuers that would have been exempt under the new rule. We use a fuzzy regression discontinuity design to estimate the effects of internal control audits on internal control quality, internal control report informativeness, and financial reporting quality for such issuers. We find little evidence that internal control audits improve either internal control or financial reporting quality for low-revenue issuers. Together, our findings indicate that issuers readily took advantage of the exemption and suggest that concerns regarding significant declines in reporting quality for exempted firms may not be warranted.

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

Suggested Citation

McCallen, Jennifer and Schmardebeck, Roy and Shipman, Jonathan E. and Whited, Robert Lowell, Evidence on the 2020 Exemption of Low-Revenue Issuers from the Internal Control Audit Requirement (May 30, 2022). 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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