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We investigate how firms’ responses to misconduct change when the institutional environment becomes more stringent. Organizational theory offers conflicting perspectives on whether new legislation will increase or decrease pressure on firms to take remedial action following misconduct. The dominant perspective posits that new legislation increases expectations of firm behavior, amplifying pressure on them to take remedial action after misconduct. A more recent perspective, however, suggests that the mere necessity to meet more stringent regulatory requirements certifies firms as legitimate to relevant audiences. This certification effect buffers firms, reducing the pressure for them to take remedial action after misconduct. Using a temporary, largely arbitrary exemption from a key provision of the Sarbanes-Oxley Act, we show that firms that were not required to meet all the regulatory standards of good governance it required became 45% more likely to replace their CEOs following the announcement of an earnings restatement after Sarbanes-Oxley. On the other hand, those that were required to meet all of Sarbanes-Oxley’s provisions became 26% less likely to replace their CEOs following a restatement announcement. Ironically, CEOs at firms with a legislative mandate intended to increase accountability for corporate misconduct shoulder less blame than do CEOs at firms without such legislative demands.

The purpose of this study is to examine the change in audit fees for US‐listed foreign firms in their first year of providing Section 404 auditor attestation reports for fiscal years ending between July 15, 2006 and July 14, 2007.

During the sampling time period, foreign large accelerated filers had to provide both auditor and management Section 404 reports while the foreign accelerated filers only had to provide management Section 404 reports without the auditor attestation reports. Foreign non‐accelerated filers did not have to provide any Section 404 report. This research design and sample allows the authors to control for the general market‐wide increases in audit fees. The paper examines the annual change in audit fees from the preceding year to the first year of Section 404 compliance.

It is found that foreign large accelerated filers have an average increase of 74 percent in audit fees in this first year of Section 404 compliance, while the foreign accelerated filers and non‐accelerated filers only have increases in audit fees of 33 percent and 42 percent, respectively. Since this research design and sample allow the authors to control for the general market‐wide increases in audit fees, the authors are able to conclude that foreign large accelerated filers incurred, on average, a 30 percent increase in audit fees just to comply with Section 404. It is also found that the increase in audit fees among foreign large accelerated filers is negatively associated with the strength of their home countries' legal environment.

Arguably, Section 404 is perhaps the most controversial aspect of Sarbanes‐Oxley Act due to its high audit fees. The results of this study would provide interesting findings to regulators and researchers.

Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX 404) requires auditors to attest to, and report on, management's assessment and effectiveness of the company's internal control systems. This paper aims to examine investor reaction to companies' announcements of new information technology (IT) or improved existing IT to satisfy requirements of Section 404 of the Sarbanes‐Oxley Act of 2002.

Using a sample of 124 SOX‐related IT announcements from 2003 to 2007, an event study measuring market reactions using average cumulative abnormal return is undertaken. Additionally, the cross‐sectional variation in the marketplace is analyzed to test the effect of firm‐specific factors on market responses.

The empirical results suggest that the stock market reacts favorably to corporations that invest in SOX 404‐related IT. The reaction is more favorable toward companies without prior reported internal control deficiencies/weaknesses. Additionally, the results marginally support the notion that firms with higher risk and poorer financial reporting quality can demonstrate their commitment to improve internal control over financial reporting by investing in IT for SOX 404 compliance.

The findings will influence companies' IT investment decisions, particularly IT decisions that are SOX Section 404‐related. Potential benefits of SOX 404 IT investments include favorable market returns. Additionally, the study contributes to a deeper understanding of SOX for standard‐setting and regulation bodies examining past rulings and preparing for future regulation.

This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans.

The study uses a sample of 1,173 US-listed firms that issued syndicated loans both before and after their compliance with SOX 404 to analyze the changes in loan spread’s sensitivity to some key accounting metrics such as ROA, interest coverage, leverage and net worth.

The study finds that the interest spread’s sensitivity to key accounting metrics, most noticeably for ROA, declined following the borrower’s compliance with the requirements of SOX 404. The decline was not explainable by borrowers that disclosed internal control weaknesses but concentrated among borrowers suspected of real earnings management (REM).

By examining the effects of SOX 404 on banks’ pricing process, this study augments the literature on SOX’s economic consequences. The findings suggest that lenders perceive little new information from SOX 404 disclosures of internal control deficiencies and are cautious about the accounting information provided by REM borrowers. It also extends the research on the use of accounting information in debt contracting. By examining loan interest’s sensitivity to accounting metrics, it broadens the concept of debt contracting value of accounting information to include accounting’s usefulness for assessing credit risk at loan inception.

Central to the Sarbanes–Oxley Act was a requirement that every company have an audit of its internal control over financial reporting. However, there were concerns that this requirement was overly burdensome, from a financial perspective, for small businesses. This concern promoted several delays in enforcing the law for small companies and ultimately caused congress to permanently exempt small businesses. Yet, there are some small companies that voluntarily elect to comply with the law. The purpose of this paper is to explore why these companies elect to incur these costly audits.

Using a sample of 5,834 non-accelerator US firms, this paper uses a robust logistic regression model to examine why some firms comply voluntary with SOX Section 404(b).

This study shows that small companies getting audits of internal controls may be doing so to restore investor confidence after reporting failures, to appear credible prior to raising funds, as a response to organizational changes, or in anticipation of being required to comply.

This study provides regulators with an improved understanding of when it is necessary to implement mandatory rather than voluntary guidance.

This study is the first to document why a client would voluntarily comply with SOX Section 404 (b).

The purpose of this paper is to explore the impact of the Sarbanes‐Oxley (SOX) Act of 2002 on small corporations when compared to large firms and to investigate differences perceived by small and large firms with respect to costs and internal controls.

A questionnaire containing 20 questions (five demographic and 15 addressing issues related to SOX implementation) was mailed to 5,479 board members, chief executive officers (CEOs) and chief financial officers (CFOs) of 676 separate firms with 117 completed surveys returned.

The results of the study show significant differences in the responses between small and large firms concerning: the overall impact of SOX on the firm; the amount of time dedicated to SOX; the role of the external auditor; the firm's implementation stage; the most significant challenges due to SOX implementation; the corporate governance reforms instituted; and changes in board compensation.

The basic limitation of this paper is the low‐response rate (slightly more than 2 per cent) which is not surprising since CEOs, CFOs, and board of directors have a low tendency to respond to surveys.

The findings of this paper suggest that: recent actions taken by the Securities and Exchange Commission (SEC) are appropriate in providing much needed relief for smaller public firms; and lend support for further actions of assistance by the SEC. This paper is of value to academicians, practitioners and to an international audience engaged in the harmonization of accounting standards.

Corporate scandals at Enron, Tyco, and MCI highlight the issue of opportunistic management behavior. The US Congress responded to these scandals by passing the Sarbanes‐Oxley Act of 2002 (SOX). SOX imposes additional management responsibilities and corporate operating costs on companies trading under SEC regulations. This paper examines three options for US corporations responding to SOX: compliance with SOX, taking a company private, or moving to a non‐ SEC‐regulated exchange, such as an international exchange. The paper then examines potential corporate governance options using Transaction Cost Economics (TCE; Williamson 1985) to develop propositions regarding which options firms may select.

The purpose of this paper is to estimate the cost of the internal control audit for small firms and assess whether the costs are scalable or, alternatively, whether they are higher in relation to firm size for small firms than for larger firms.

The method estimates the Section 404 audit fee premium for companies that became accelerated filers for the first time in 2006 and 2007. The authors use the estimated audit fee premium as a proxy for the premium that non‐accelerated filers would have to pay if they were required to obtain an internal control audit.

The main finding shows that the Section 404(b) estimated cost of the internal control audit divided by assets are significantly higher for non‐accelerated filers and first‐time filers than for those of larger firms.

One limitation of the study is that, while it shows that the costs of the Section 404 audit are not scalable to firm size, it does not prove that the costs of the audit exceed the benefits for non‐accelerated filers.

The finding that the costs are proportionately higher for small firms provides some evidence supporting the decision to permanently exempt non‐accelerated filers from Section 404(b).

The results show that smaller firms pay proportionately more for the Section 404 internal control audit than larger firms. This suggests that the revised AS no. 5 did not succeed in making the internal control audit completely scalable to firm size.

The purpose of this paper is to examine the determinants of internal control weakness remediation revealed under Sarbanes‐Oxley (SOX) section 404 reporting requirements.

Data on firms that reported internal control weaknesses for fiscal year 2004 are collected, and determined whether these weaknesses still existed in their 2005 filings. Logistic regression is used to examine the impact of corporate governance, resource, impediments (e.g. severity of weakness), and Big 4 auditor status on remediation completion.

Resources (e.g. size, ROA) were positively associated with remediation. Use of Big 4 auditor, more audit committee meetings, more business segments, and filing lag were negatively associated with remediation, as were number and type of internal control weaknesses.

First, the paper sheds light on the individual firm factors that influence corporate response to the legal and social (e.g. public pressure) environment facing firms. Understanding this should better enable policy makers and regulators to foresee where potential lags in firm implementation of regulations may occur, and why. Second, it believes that the paper also sheds light on the relative value of different corporate governance structures in meeting investor concerns for proper stewardship of their investments. Finally, this paper provides information of use to other corporate governance researchers in that the results suggest the overwhelming importance of the legal and social environment in influencing corporate behavior. However, this paper does not address the contribution of national culture, financial and audit‐related reporting requirements, and differences in firm resources, to corporate behavior.

The paper deepens the field's understanding of the determinants of internal control weakness remediation, furthering regulators' understanding of SOX's impact.

The purpose of this paper is to investigate the association between auditor industry specialization and audit fees surrounding Section 404 implementation.

With a sample of 1,006 industrial firms over the 2003-2005 reporting periods, an ordinary least square regression model was used to regress change in audit fees on auditor specialization measure and other control variables.

It was found that auditor industry specialization is negatively related to the change in audit fees during the first year of Sarbanes–Oxley Act (SOX) compliance (2003-2004). It was also found that there were no significant cost savings associated with auditor industry specialization in the second year of SOX compliance (2004-2005).

These results suggest that industry-specific expertise may enable auditors to adapt more efficiently to new significant audit standards and regulations, but that such efficiencies are likely to be most pronounced during the initial implementation year.

Auditor competition and auditor specialization are at the forefront of today’s ever-changing accounting industry. Analysis of a contemporary auditing issue (auditor specialization) in the context of major legislation (SOX) provides a research setting that gives both academics and practitioners valuable insight toward how future legislation can impact current accounting industry issues such as the increasing need to have more expertise.