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

54 Pages Posted: 17 Jul 2019 Last revised: 13 Nov 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: November 1, 2019

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

Suggested Citation

McCallen, Jennifer and Schmardebeck, Roy and Shipman, Jonathan E. and Whited, Robert Lowell, Have the Costs and Benefits of SOX Section 404(b) Compliance Changed Over Time? (November 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

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