A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance

Nondorf, Maria E.; Singer, Zvi; You, Haifeng

doi:10.2139/ssrn.1004965

Cited by 10 publications

(11 citation statements)

References 40 publications

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“…They also find that NAFs disclose negative news and report lower accounting earnings in the second fiscal quarter (when public float is calculated). Nondorf, Singer and You (2012) analyze a sample of 257 firms that have public float around the $75 million threshold. They find evidence of changes in ownership by insiders, and of the use of earnings management in financial reporting during the second fiscal quarter, that are consistent with attempts to remain below the threshold.…”

Section: ) Related Literaturementioning

confidence: 99%

“…). In reality, there may be other mechanisms to achieve this aim, such as disclosures that reduce stock price or reclassification of the insider status of blockholders (Gao, Wu and Zimmerman, 2009;Nondorf, Singer and You, 2012;Gao, 2016). The focus here on the potential manipulation of is purely illustrative; the empirical analysis does not hinge on this 21 Suppose that we define more generally as:…”

Section: 2) a Simple Model Of Firms' Bunching Behavior Near The $75mentioning

confidence: 99%

“…As discussed in the prior literature, firms have available a variety of mechanisms through which public float might potentially be "managed," such as insider purchases of stock or disclosures that reduce stock price (Gao, Wu and Zimmerman, 2009;Nondorf, Singer and You, 2012;Gao, 2016). Of course, each of these strategies entails some type of cost.…”

Section: ) Introductionmentioning

confidence: 99%

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Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(B)

Dharmapala

2016

SSRN Journal

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An extensive literature has analyzed the Sarbanes-Oxley (SOX) legislation enacted in 2002, but its social welfare consequences remain controversial. One of the most significant provisions of SOX-auditor attestation of internal controls under Section 404(b)-has been applied only to firms that have a public float (i.e. the market value of shares held by non-insiders) of at least $75 million. Public float is not reported in standard databases; this paper "scrapes" public float data from 10-K filings, resulting in about 161,000 observations at the firm-year level for the universe of reporting entities for fiscal years 1993-2015. The analysis compares the number of public float observations immediately below the $75 million threshold to a smooth counterfactual density estimated using a flexible polynomial fitted to the observed density away from the threshold. In the pre-SOX period, there is no detectable divergence between the actual and counterfactual density around $75 million. Since the enactment of SOX, there is substantial and statistically significant "bunching" below the threshold, exhibiting a bimodal pattern. The magnitude of bunching implies that firms around the threshold reduce their public float by about $1.7 million. This estimate is consistent with SOX 404(b) imposing a net compliance cost of about $4-$6 million (in present value terms) on firms in the region of the threshold. The results are robust to considering various alternative explanations for bunching, including the possibility that firms' insiders avoid crossing the threshold in order to continue extracting private benefits of control. The paper also explores potential financial and economic consequences of bunching, in particular on the debt financing and investment choices of firms close to threshold. JEL-Codes: G380, K220.

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Section: ) Related Literaturementioning

confidence: 99%

Section: 2) a Simple Model Of Firms' Bunching Behavior Near The $75mentioning

confidence: 99%

Section: ) Introductionmentioning

confidence: 99%

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Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(B)

Dharmapala

2016

SSRN Journal

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“…For example, SOX02 Sec. 404, which requires management to evaluate and attest to the internal control structure within ninety days of the audit report date, os estimated to have cost Fortune 100 companies about $7.8 million in 2005 of which audit fees were $1.9 million (Nondorf et al , 2011 In SAS 99, the AICPA basically mirrored the tenets of SOX02 and increased the auditor's due diligence responsibility for recognition of fraud. It also recommended extended use of technology for substantive testing and audit of controls.…”

Section: Impact Of Regulationmentioning

confidence: 99%

Developing a Forensic Continuous Audit Model

Kearns¹,

Barker²,

Danese³

2011

JDFSL

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Despite increased attention to internal controls and risk assessment, traditional audit approaches do not seem to be highly effective in uncovering the majority of frauds. Less than 20 percent of all occupational frauds are uncovered by auditors. Forensic accounting has recognized the need for automated approaches to fraud analysis yet research has not examined the benefits of forensic continuous auditing as a method to detect and deter corporate fraud. The purpose of this paper is to show how such an approach is possible. A model is presented that supports the acceptance of forensic continuous auditing by auditors and management as an effective tool to support the audit function, meet management's regulatory objectives, and to combat fraud. An approach to developing such a system is presented.

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“…Regarding the exemption for non-accelerated filers to comply with Section 404 (b), existing literature documents a prevailing phenomenon that firms which are slightly around accelerated filer definition threshold reduced their market float or retain their market float below the $75 million threshold to avoid heavy compliance costs with 404 (b) (Gao, Wu, & Zimmerman, 2009;Nondorf, Singer, & You, 2012). However, to the best of our knowledge, few to none research have investigated the opposite phenomenon: there are still some non-accelerated filers who voluntarily have their external auditors to perform Section 404 (b) internal control audit, albeit its dramatically high compliance cost.…”

Section: Introductionmentioning

confidence: 99%

Why Non-accelerated Filers Voluntarily Comply with SOX 404b?

Liu

Cheng

Liu

2020

ijafr

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This paper investigates the managers’ incentives to voluntarily comply with SOX 404b and the determinants of firms who voluntarily disclose SOX 404b internal control over financial reporting assessment. We find that voluntary SOX 404b reporting non-accelerated filers are more likely to receive effective internal control over financial reporting opinion than accelerated filers and large accelerated filers. We find that voluntary SOX 404b reporting non-accelerated filers are more likely to hire Big Four as independent auditors than non-SOX 404b reporting non-accelerated filers. We also predict and found substantially sufficient cases where non-accelerated filers which used to be, or ex-post became accelerated filers or large accelerated filers, and non-accelerated filers with parent companies complying with SOX 404b are motivated to voluntarily comply with SOX 404b.

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A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance

Cited by 10 publications

References 40 publications

Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(B)

Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(B)

Developing a Forensic Continuous Audit Model

Why Non-accelerated Filers Voluntarily Comply with SOX 404b?

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