The Sarbanes‐Oxley Act of 2002: what impact has it had on small business firms?

Abstract

Purpose -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. Design/methodology/approach -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. Findings -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.Research limitations/implications -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. Originality/value -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.

Diversification by the Audit Office and Its Impact on Audit Quality

“…Given limited resources, audit offices that are more diversified across industries sacrifice the advantage of industry specialization. Industry specialization has been shown to improve audit quality (Carcello and Nagy 2002;Balsam et al 2003;Krishnan 2003 (Hardesty 2008); have weaker audit committees with fewer independent directors and financial experts (Gramling et al 2009); and have weaker internal controls (Michelson et al 2009). Larger (influential) clients have more bargaining power and get fee discounts from their auditors (Casterella et al 2004) and have better earnings quality (Reynolds and Francis 2001;Francis and Yu 2009).…”

Corporate environmental responsibility and audit risk

“…At first blush our response rate may appear low; however, our response rate and final sample compare to those in contemporaneous studies. For example, in a recent US study involving the impact of the Sarbanes Oxley Act of 2002 on small business firms, Michelson et al (2009) mail 5,479 surveys and receive 117 completed surveys, for a response rate of 2.1 per cent. We acknowledge that our response rate may have been negatively impacted by two factors.…”