Sox Costs: Auditor Attestation Under Section 404

34 Pages Posted: 19 Jun 2005

See all articles by Susan W. Eldridge

Susan W. Eldridge

University of NE at Omaha

Burch T. Kealey

University of Nebraska at Omaha

Date Written: June 13, 2005


This study examines the cost of the new internal control audit required by the Sarbanes-Oxley Act of 2002 (SOX) for a sample of Fortune 1000 companies. The average audit fee increase from 2003 to 2004 of $2.3 million is significant and is primarily attributable to the new SOX audit. SOX audit costs appear to be based on company size, asset growth, and the effectiveness of internal controls in addition to the 2003 financial statement audit rate. Specifically, the SOX audit costs increase with size, but the SOX audit unit costs vary inversely with size. This inverse relationship is consistent with larger companies benefiting from returns to scale and smaller companies spending fewer resources on internal controls and being more likely to have material weaknesses in internal controls. The positive relationship between SOX audit costs and asset growth supports the notion that rapidly growing firms may not be able to update their internal control systems in a timely manner and, therefore, may be more likely to experience internal control weaknesses. Firms that reported ineffective internal controls experienced higher SOX audit costs than those that reported effective internal controls. We also find evidence that financial services firms paid significantly lower SOX audit rates and electronic equipment and electronics firms paid significantly higher SOX audit rates than firms in other industries.

Keywords: Audit fees, Sarbanes-Oxley Act, internal controls, compliance costs

JEL Classification: M41, M49, G34, G38

Suggested Citation

Eldridge, Susan W. and Kealey, Burch T., Sox Costs: Auditor Attestation Under Section 404 (June 13, 2005). Available at SSRN: or

Susan W. Eldridge (Contact Author)

University of NE at Omaha ( email )

6708 Pine St
Suite 228
Omaha, NE 68182
United States
402-554-2504 (Phone)

Burch T. Kealey

University of Nebraska at Omaha ( email )

6001 Dodge Street
Omaha, NE 68182
United States

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