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

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