Have the Effects of SOX Section 404(b) Compliance Changed Over Time?

55 Pages Posted: 17 Jul 2019 Last revised: 16 Apr 2020

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: April 1, 2020

Abstract

We use regression discontinuity design to evaluate the effects of Section 404(b) of the Sarbanes-Oxley Act (SOX) on audit costs and financial reporting and how these effects 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 find that the likelihood that a company selects a Big 4 auditor is greater for 404(b) compliers and that this drives a portion of the audit fee premium. Although we find some evidence that compliance results 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. Together, while evidence suggests that audit fees associated with internal control audits have not materially and sustainably declined since inception, we find no evidence that the increased audit effort is associated with improved internal control quality or reporting. Our findings directly respond to calls from regulators and academics for research on the updated Section 404(b) compliance rules recently introduced by the SEC and should be of interest to a variety of corporate stakeholders.

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 Effects of SOX Section 404(b) Compliance Changed Over Time? (April 1, 2020). 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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