SOX Costs: Auditor Attestation under Section 404

Eldridge, Susan W.; Kealey, Burch T.

doi:10.2139/ssrn.743285

Cited by 39 publications

(24 citation statements)

References 3 publications

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“…In the Securities and Exchange Commission parlance, 'non-accelerated' filers are companies with public float less than $75 million that were able to postpone compliance with Section 404 until 2008. Small businesses opposed this regulation, because compliance costs disproportionately affected them relative to large firms (Eldridge and Kealey, 2005). Using a carefully constructed control sample to account for company evolution, Gao et al (2009) show that when small companies are exempted from costly regulations, they have an incentive to stay small.…”

Section: Survey 36mentioning

confidence: 99%

Response of the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper:Towards a Disclosure Framework for the Notes

Barker

Barone

Birt

et al. 2013

Accounting in Europe

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Section: Survey 36mentioning

confidence: 99%

Response of the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper:Towards a Disclosure Framework for the Notes

Barker

Barone

Birt

et al. 2013

Accounting in Europe

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“…However, from the outset small businesses strongly opposed the one‐size‐fits‐all regulatory approach. Due to the fixed component in compliance costs, small firms are disproportionately impacted relative to large firms (e.g., Eldridge and Kealey [2005], A.R.C. Morgan [2005]); they have to compete with large firms for the post‐SOX limited supply of auditors and face a sharp rise in audit costs 5 .…”

Section: Introductionmentioning

confidence: 99%

Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes‐Oxley Act

Gao

Zimmerman

2009

J of Accounting Research

227

109

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This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations—these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX) for “non‐accelerated filers” (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non‐affiliates, making more bad news disclosures, and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.

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“…Further, Eldridge and Kealey (2005) and Raghunandan and Rama (2006) provide evidence that audit fees increased when Section 404 of SOX, which required auditors to provide an opinion on the client's internal controls, came into effect for larger firms in 2004. Consistent with Ghosh and Pawlewicz (2008), we find that audit fees increased in the post-SOX period; and, consistent with Eldridge and Kealey (2005) and Raghunandan and Rama (2006), we find audit fees increased further once Section 404 became effective. SOX is coded 1 for 2002-2008 and S404 is coded 1 for 2004-2008.…”

Section: Additional Analysesmentioning

confidence: 99%

The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

et al. 2014

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Audit clients' investment opportunity sets (IOS) include firm‐specific opportunities that are unique to the client, as well as opportunities generalizable to the client's industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm‐specific IOS nor how firm‐specific IOS affects the premiums charged by industry specialist auditors. We find that firm‐specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm‐specific IOS, as the knowledge gleaned in auditing other clients within the industry is often not applicable to clients in more unique IOS environments. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade‐off between firm‐ and industry‐specific knowledge.

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SOX Costs: Auditor Attestation under Section 404

Cited by 39 publications

References 3 publications

Response of the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper:Towards a Disclosure Framework for the Notes

Response of the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper:Towards a Disclosure Framework for the Notes

Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes‐Oxley Act

The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

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