Have the Costs and Benefits of SOX Section 404(b) Compliance Changed Over Time?

Abstract

This paper uses regression discontinuity design (RDD) to evaluate how the costs and benefits of Section 404(b) of the Sarbanes-Oxley Act (SOX) have changed over time. While audit fee premiums associated with 404(b) compliance were substantial in the initial years of compliance, we find that the premiums declined until 2010 before reversing and returning to early SOX levels by 2015. We also estimate significantly higher internal costs for compliers. Although we find some evidence that compliance resulted in more effective internal controls, this effect is confined to the initial years following the extension of management internal control reporting to non-accelerated filers. We find no evidence that the audit of internal controls over financial reporting yields more informative internal control reports or reduces restatement likelihood. Together, our evidence suggests that compliance costs have not materially and sustainably declined since inception and that these costs do not appear to be justified by financial reporting benefits.

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