Search results

The purpose of this paper is to analyze the efficiency of the internal control reporting (ICR) requirements imposed by Sections 302 and 404 of the Sarbanes‐Oxley Act of 2002 (SOX). The lessons learned are then applied to the current financial crisis.

The Coase Theorem is applied to the events leading up to the collapse of Enron and the enactment of SOX. The paper then analyzes the efficacy of the various examples of ICR regulation, both pre‐ and post‐SOX, noting the ways in which they effectively mitigate transaction costs and the ways in which they over‐regulate.

US investors continue to invest in foreign markets despite the fact that those markets maintain less demanding ICR requirements than those required by Section 404. Moreover, investors do not respond negatively to Section 404 disclosures. The research demonstrates that Section 404 does not provide useful information in the minds of investors. Considering Section 404's ineffectiveness and the burdensome costs it imposes on reporting companies, it is clear that Section 404 is an example of over‐regulation and should be repealed.

The transaction costs that caused the collapse of Enron and the enactment of SOX bear strong similarities to those causing the more recent subprime mortgage crisis. The lessons learned from the enactment of SOX Section 404 are directly applicable to the current financial crisis and should be noted moving forward.

By utilizing a law and economics perspective, the paper more clearly demonstrates how Section 404 is an example of over‐regulation and draws links to the current economic crisis.

The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time.

This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance.

Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b).

Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns.

While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.

The financial reporting requirements for publicly traded companies have undergone a significant transformation due to the passage of the Sarbanes‐Oxley Act (SOX). Companies are now required to report on the operating effectiveness of their internal controls over financial reporting. Additionally, the independent auditor is required to assess and report on the effectiveness of their client's internal controls, and they must attest to management's internal control assessment. The purpose of this paper is to examine the costs and benefits associated with Section 404 of the SOX of 2002.

Qualitative analysis and deductive reasoning are used to evaluate the net benefits of Section 404 to the securities markets.

Qualitative analysis demonstrates that the new internal control reporting requirements have negative net benefits to the securities markets because of excessive cost and ambiguous interpretation. Elimination of formal internal control reporting is recommended.

This paper demonstrates that major revisions of Section 404 of the SOX are desirable for optimal allocation of resources related to financial reporting.

This paper introduces section 404 of the Sarbanes‐Oxley Act of 2002 to corporate real estate (CRE) executives and identifies some of the effects that this new legislation has on the management of CRE operations with respect to financial reporting controls. While section 404’s reach includes all financial reporting, this paper focuses on capital projects and describes one method for establishing necessary financial reporting controls through a Management by Projects approach.

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.

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.

This paper seeks to discuss the effect that the Sarbanes‐Oxley Act (SOA) had on both the nature of the external audit function and overall audit quality. Additionally, it aims to discuss how audit firms maneuvered through the newly regulated environment, and what their strategic actions are for the future.

This discussion is based on interviews conducted with auditors from nine public accounting firms located in Northeast Ohio, United States of America. The sample consisted of five national and four regional firms, and the interviewees included mostly partners and a few senior managers.

The increased oversight and workload resulting from the SOA requirements has changed the nature of the external audit function to more compliance type work, and the environment has created much anxiety for the auditors. The new reform has significantly impacted the audit environment in terms of: scope of services; client assessment procedures; management and audit committee relationships with the external auditor; audit firm personnel management; and the long‐term outlook of the profession. The details of these impacts are discussed throughout the paper.

This paper provides detailed insight as to how the SOA impacted the audit profession. Hopefully, such an understanding will benefit future research in measuring the costs and benefits of the new reform. Lastly, a future research showed further examine the effect that the SOA has had on overall audit quality.

This paper summarizes the insightful comments obtained in structured interviews with several leading audit professionals. The sample was judged to be highly knowledgeable of the changing audit environment caused by the SOA. With an improved understanding of its impacts, regulators, practitioners, and academics can better assess the effectiveness of the SOA.

The purpose of this paper is to provide more comprehensive analysis of the effects of Sarbanes‐Oxley (SOX) Act on both audit fee premium and auditor change in the US audit market.

The audit fee premium model is employed to track the trend in audit fee premium between 2000 and 2006 for small accelerated filers compared with large accelerated filers and non‐accelerated filers and how the change in auditor affected such trend around the enactment of SOX.

The results indicate a significant shift in audit fee premium during early years of SOX compliance especially for small accelerated filers compared with large accelerated filers or non‐accelerated filers. Such shift started to wind down during 2006 after the initial application of SOX requirements. Although clients who switched from big to non‐big auditors have experienced a slower increase in their audit fees, these fee savings are lower for small accelerated filers during 2004 and 2005 with the increasing demand for audit services in the US audit industry during these years.

The compliance costs of significant regulatory changes like SOX may be upfront loaded but their benefits are long‐term benefits in terms of higher quality of financial reporting and better internal controls over financial reporting. When analyzing the effects of such regulatory changes, practitioners and researchers should factor these costs and benefits over a sufficient time horizon.

More comprehensive analysis of SOX effects on the US audit industry not only in the short run during early compliance years, but also in the longer run after the initial setup process.

Recent studies have concluded that auditors underreport existing internal control over financial reporting (ICFR) weaknesses. This study aims to assess how effective external auditors are, as independent third parties, at disclosing reliable opinions to the public on the ICFR.

Using a logistic regression, the authors analyzed a sample of 106 US companies classified as large accelerated filers or accelerated filers consisting in 53 companies which restated their financial statements and a control group of 53 companies having “clean financial statements” at any given moment during the research period, between 2005 and 2018.

The results indicate that only 34% of companies with financial statements deemed unreliable have received an adverse ICFR opinion issued by the external auditor during the misrepresentation period or its prior year. The authors also notice that external auditors are somewhat effective in identifying and disclosing red flags to the public that certain companies have internal control (IC) material weaknesses. The results also indicate that the average presence of an adverse IC opinion issued by the external auditor during the misrepresentation period or its prior year for companies with unreliable financial statements is higher than for companies with financial statements deemed reliable.

This study tests if an increase in efforts and disbursements with audit fees are justifiable by external auditors’ issuing effective, reliable opinions and reinforcing a more transparent and ethical capital markets environment, that is, an environment where accurate information is available for stakeholders. If external auditors are negligent in providing a qualitative and independent opinion to stakeholders, the increase of disbursements made with audit fees is less justifiable. Thus, the research has practical implication for auditors as well as standard setters.

This study extends the literature on ICFR by empirically testing whether the public can rely on external auditors’ opinions expressed on Sarbanes–Oxley Section 404 reports.

To provide background for senior and middle management in information technology organizations who may be in the implementation phase of compliance for Sarbanes‐Oxley (SOX). As the information technology (IT) organization looks forward to additional compliance or other IT control frameworks such as COBIT, the paper can help construct a roadmap. Other audiences include senior management, accountants, internal auditors, and academics who may wish to evaluate the impact of SOX on the information technology organization.

SOX is surveyed to understand the four major compliance areas that must be supported in the IT organization. Recently published works are integrated into an evaluation of enterprise resource planning (ERP) research to identity several ongoing themes that point to practical advice for implementing SOX. The private sector of US business is saturated with ERP applications and provides a useful benchmark of what to expect with SOX compliance. The sections of this report include: SOX and IT governance; ERP systems: recurring themes; after the initial implementation of SOX; frameworks to support SOX compliance; IT governance and SOX: where we go from here; to best practice and competitive advantage; and conclusion.

Competencies in several related core disciplines including project management, change management, and software integration should be the top priority for SOX implementation. Enterprise architecting and related areas such as security and outsourcing can be managed more effectively with the appropriate competencies.

The authors' observations are based on several research reports but are not exhaustive, and are not specific to a particular industry.

The content is a very useful source of information for senior management, IT management, accountants, auditors, and academics to understand the impact of SOX on the IT organization and how to develop a roadmap to respond.