To exempt or not to exempt non-accelerated filers from compliance with the auditor attestation requirement of Section 404(b) of the Sarbanes–Oxley Act

Brown, Kareen; Elayan, Fayez A.; Li, Jingyu; Mohammad, Emad; Pacharn, Parunchana; Liu, Zhefeng Frank

doi:10.1016/j.racreg.2016.09.005

Cited by 5 publications

(6 citation statements)

References 17 publications

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“…Consistent with this view, empirical evidence shows that nonaccelerated filers experienced audit fee shocks (i.e., had to pay higher audit fees), even though they were exempted from the requirement of having their internal controls audited (Ettredge et al., 2018). Furthermore, there is evidence that the market response to the permanent Dodd's exemption on November 4, 2009 was negative, particularly for nonaccelerated filers that did not voluntarily comply with Section 404 (Brown et al., 2016). Thus, even though compliance with Section 404(b) was not required for smaller clients, audits became more expensive, because they were more expensive to produce (Ettredge et al., 2018).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…Stated otherwise, by exempting nonaccelerated filers from required internal control audits, Dodd's Act deprived audit firms from a potential source of revenue (i.e., internal controls‐related audit fees). However, market expectations of audit quality increased in the post‐Dodd period (Brown et al., 2016), and thus audits in general became more expensive to produce. In such context, auditors might have to stay longer with their clients to earn quasi rents beyond the additional audit costs needed to meet a higher level of expected financial reporting quality.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

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The impact Dodd Frank's Act on audit firm tenure

Akono

2024

J Corp Accounting Finance

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This study examines the effect of Dodd Frank's Act of 2010 (Dodd's Act) on the duration of the auditor‐client relationship. One of the provisions of Dodd's Act was to permanently exempt nonaccelerated filers from mandatory internal control audits and to maintain the internal control requirement for accelerated filers. The results indicate that average audit firm tenure has increased significantly in the post‐Dodd period, and there is a post‐Dodd increase (decrease) in long and medium (short) tenure. Furthermore, the increase is more pronounced for nonaccelerated filers on average, and varies across big4 and non‐big4 auditors. The inferences are robust to the inclusion of various controls, and to the exclusion of the financial crisis period (2008–2010). Collectively, the findings suggest that Dodd's Act permanent exemption has resulted in lower margins for auditors, and thus motivated audit firms, particularly non‐big4 auditors, to extend their tenure with clients.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

The impact Dodd Frank's Act on audit firm tenure

Akono

2024

J Corp Accounting Finance

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“…For example, Brown et al (2016) reported a negative market reaction when SOX 404(b) was rescinded for nonaccelerated filers, with market reaction being worse for the companies that did not voluntarily comply with Section 404(b). For example, Brown et al (2016) reported a negative market reaction when SOX 404(b) was rescinded for nonaccelerated filers, with market reaction being worse for the companies that did not voluntarily comply with Section 404(b).…”

Section: Voluntary Reporting and Controlsmentioning

confidence: 99%

“…With respect to voluntary reporting on internal control, findings are also mixed. For example, Brown et al (2016) reported a negative market reaction when SOX 404(b) was rescinded for nonaccelerated filers, with market reaction being worse for the companies that did not voluntarily comply with Section 404(b). Further, Cassell, Myers, and Zhou (2013) showed that voluntary compliers have a lower cost of debt and equity.…”

Section: Voluntary Reporting and Controlsmentioning

confidence: 99%

The impact of the Sarbanes–Oxley Section 404(b) exemption on earnings informativeness

Lyubimov

Davis²,

Trompeter

2019

Int J Auditing

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We investigate whether firms who voluntarily drop compliance with Section 404(b) of Sarbanes-Oxley (SOX)-the requirement to have an outside auditor conduct an audit of internal control over financial reporting-suffer a loss of earnings informativeness. Section 404(b) has been widely criticized for imposing costs in excess of the benefits to investors. Calls for wholesale repeal and increasingly wide exemptions from compliance continue to this day. The fact that non-US regulators have not passed similar regulation outside of the USA appears to be partially driven by similar cost concerns. Our results indicate that voluntary dropping of 404(b) is associated with a drop in earnings informativeness. This result is driven primarily by financially distressed companies. Our results address previous calls for research about the market's perception of 404(b) compliance and suggest that regulators may wish to consider firm characteristics when determining which firms should be required to purchase an audit of internal control over financial reporting. K E Y W O R D Sauditing standards, internal control, regulation, earnings management

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“…Internal control material weakness disclosures are positively associated with financial statement restatements for both accelerated and non-accelerated filers. Brown et al (2016) examined the stock market reaction to the SEC announcement to permanently exempt non-accelerated filers from compliance with Section 404(b). They documented a negative market reaction to the exemption announcement, suggesting that auditor attestation enhances firm value.…”

Section: Relevant Research and Hypotheses Developmentmentioning

confidence: 99%

Material weakness disclosures and restatements: value of external auditor attestation

Guragai

Hutchison

2019

ARJ

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Purpose The purpose of this study is to examine the value of auditor attestation in internal control over financial reporting (ICFR) disclosures. The authors argue that internal control material weakness (ICMW) disclosures issued without auditor attestation by non-accelerated filers provide weaker signal to the impaired financial reporting quality compared to those issued with auditor attestation by accelerated filers. Design/methodology/approach This study investigates the differences in the association between ICMW disclosures and impaired financial reporting quality, as proxied by financial statement restatements, for accelerated and non-accelerated filers. The authors use propensity score matching to find control groups for both accelerated and non-accelerated filers. Findings The authors find that ICMW disclosures signal impaired financial reporting quality for both accelerated and non-accelerated filers, but such signaling is weaker for non-accelerated filers compared to accelerated filers. Research limitations/implications Although propensity score matching was used to match firms with and without ICMW disclosures, any unobservable fundamental differences between these groups may affect the results of this study. Originality/value This study shows that auditors’ involvement in the assessment of internal control effectiveness improves the signaling effect of ICMW disclosures on impaired financial reporting quality. As approved by the House Financial Services (HFS) Committee on November 4, 2009, non-accelerated filers are permanently exempt from auditor attestation requirement. This study provides some evidence that the exemption of non-accelerated filers from auditor attestation may have unintended consequences, and these results should be of interest to regulators and investors.

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To exempt or not to exempt non-accelerated filers from compliance with the auditor attestation requirement of Section 404(b) of the Sarbanes–Oxley Act

Cited by 5 publications

References 17 publications

The impact Dodd Frank's Act on audit firm tenure

The impact Dodd Frank's Act on audit firm tenure

The impact of the Sarbanes–Oxley Section 404(b) exemption on earnings informativeness

Material weakness disclosures and restatements: value of external auditor attestation

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