An Analysis and Taxonomy of Disclosure Controls and Procedures Effectiveness

2016 ◽  
Vol 10 (2) ◽  
pp. A28-A37
Author(s):  
Thomas R. Weirich ◽  
Lori Olsen
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Section 404 ◽  
Research Issues ◽  
Sarbanes Oxley ◽  
Section 302

SUMMARY With the passage of the Sarbanes-Oxley Act, there has been much discussion and analysis of Section 404 dealing with management's and the external auditor's evaluation of internal controls over financial reporting (ICFR). However, Section 302 of the Act requires management to evaluate their disclosure controls and procedures (DC&P) and report on the effectiveness of such controls in their 10-Q and 10-K filings. This paper explains the SEC's differentiation of ICFR and DC&P and attempts to report on the effectiveness of DC&P utilizing the Audit Analytics database. The data show that DC&P have been ineffective, as reported by management in their 10-K filings, ranging from a low of 13.75 percent to a high of 33.91 percent of observations over the 11-year period from 2004 through 2014. The paper concludes with potential research issues related to DC&P.

Investor Perceptions of Government Deregulation: Evidence from Section 404 of the Sarbanes-Oxley Act

2020 ◽  
Author(s):  
Benjamin W Hoffman ◽  
John L. Campbell ◽  
Jason L. Smith
Keyword(s):  
Financial Reporting ◽  
Government Regulation ◽  
Abnormal Returns ◽  
Reporting Quality ◽  
Internal Controls ◽  
Litigation Risk ◽  
Section 404 ◽  
Fraud Risk ◽  
Sarbanes Oxley ◽  
Public Company

We investigate the stock market's reaction to events leading up to the Securities and Exchange Commission's (SEC) and Public Company Accounting Oversight Board's (PCAOB) 2007 regulatory changes that reduced the scope of and documentation requirements for assessments of firms' internal controls over financial reporting (ICFR), as required by Section 404 of the Sarbanes-Oxley Act. The stated goal of these regulations was to reduce firms' and auditors' compliance costs with mandatory ICFR assessments, while maintaining the effectiveness of these assessments. We examine abnormal returns surrounding key dates leading to the passage of these regulations and offer two main findings. First, investors reacted negatively on key event dates, suggesting that investors viewed the regulations as likely to reduce financial reporting quality rather than to drive firm and audit efficiencies. Second, this negative market reaction is larger when ICFR effectiveness should matter most - when firms are more complex, have higher litigation risk, and greater fraud risk. In additional analysis, we find that restatements increase in the post-regulation time period, consistent with investors' concerns that the effect of the legislation would be a reduction in ICFR effectiveness. Overall, our results may imply that investors prefer stronger government regulation when it comes to the assessments of a firm's internal controls over financial reporting.

Auditor Attestation under SOX Section 404 and Earnings Informativeness

2012 ◽  
Vol 32 (1) ◽  
pp. 61-84 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Jayanthi Krishnan ◽  
Heibatollah Sami ◽  
Haiyan Zhou
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Control Sample ◽  
Audit Fees ◽  
Test Sample ◽  
Section 404 ◽  
Earnings Informativeness ◽  
Sarbanes Oxley ◽  
Audit Reports ◽  
Section 302

SUMMARY Section 404 of the Sarbanes-Oxley Act requires managers to assess, and their auditors to express an opinion on, the effectiveness of internal controls over financial reporting (ICFR). Policymakers expect the ICFR audits to enhance the credibility of firms' financial statements. Prior research argues that audit characteristics that enhance the credibility of financial reporting are associated with stronger earnings-return associations. We examine whether earnings accompanied by the first-time Section 404 ICFR reports were associated with higher informativeness compared with earnings in the prior year when only financial statement audit reports were available. We conduct our analysis for a test sample of accelerated filers with clean ICFR reports and clean previous Section 302 disclosures. Using a difference-in-differences approach, we compare the change in earnings informativeness for the test sample with that for a control sample of non-accelerated filers. We find that earnings informativeness for companies with clean internal control reports was greater in the Section 404 adoption year than in the previous year, while there was no change in earnings informativeness for the non-accelerated filers. Also, there is no difference in the increase in earnings informativeness across firms with small and large compliance costs (measured by change in audit fees), suggesting that both groups benefited from the Section 404 ICFR audits.

SOX Section 404 Material Weakness Disclosures and Audit Fees

2006 ◽  
Vol 25 (1) ◽  
pp. 99-114 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Fiscal Year ◽  
Section 404 ◽  
Control Material ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes

2009 ◽  
Vol 84 (3) ◽  
pp. 839-867 ◽  
Author(s):  
Udi Hoitash ◽  
Rani Hoitash ◽  
Jean C. Bedard
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Expertise ◽  
Financial Expert ◽  
Section 302

ABSTRACT: This study examines the association between corporate governance and disclosures of material weaknesses (MW) in internal control over financial reporting. We study this association using MW reported under Sarbanes-Oxley Sections 302 and 404, deriving data on audit committee financial expertise from automated parsing of member qualifications from their biographies. We find that a lower likelihood of disclosing Section 404 MW is associated with relatively more audit committee members having accounting and supervisory experience, as well as board strength. Further, the nature of MW varies with the type of experience. However, these associations are not detectable using Section 302 reports. We also find that MW disclosure is associated with designating a financial expert without accounting experience, or designating multiple financial experts. We conclude that board and audit committee characteristics are associated with internal control quality. However, this association is only observable under the more stringent requirements of Section 404.

Material Weakness in Internal Controls and Stock Price Crash Risk

2017 ◽  
Vol 35 (1) ◽  
pp. 106-138 ◽  
Author(s):  
Gerald Lobo ◽  
Chong Wang ◽  
Xiaoou Yu ◽  
Yuping Zhao
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Internal Controls ◽  
Crash Risk ◽  
Significant Relation ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Section 302

We investigate the association between material weakness in internal controls (MW) disclosed under Section 302 of the Sarbanes–Oxley Act of 2002 (SOX) and future stock price crash risk. We argue that relative to firms with effective internal controls, firms with MW have lower financial reporting precision. The lower reporting precision (a) increases divergence of investor opinion with regard to firm valuation and (b) facilitates managers’ withholding of negative information, which increases the information asymmetry between managers and outside investors. We hypothesize that both these effects increase the probability of a future stock price crash. We find empirical evidence consistent with our prediction. In additional analyses, we document that the positive association between MW and crash risk is primarily driven by company level rather than by account-specific weaknesses, increases with the number of material weaknesses, and intensifies during the financial crisis. In addition, we find that both the existence and the disclosure of MW incrementally affect crash risk, and that MW facilitates managers’ withholding of bad news. Finally, we fail to find consistent evidence of a significant relation between MW disclosed under Section 404 of SOX and crash risk.

Controls, Security, and Audit in Online Digital Accounting

2011 ◽  
pp. 318-383
Author(s):  
Ashutosh Deshmukh
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Annual Report ◽  
Control Structure ◽  
Internal Controls ◽  
Section 404 ◽  
Checks And Balances ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Company

Internal controls have existed since the dawn of business activities. Internal controls are basically systems of checks and balances. The purpose is to keep the organization moving along desired lines as per the wishes of the owners and to protect assets of the business. Internal controls have received attention from auditors, managers, accountants, fraud examiners and legislatures. Sarbanes Oxley Act 2002 now requires the annual report of a public company to contain a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management’s assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting. Section 404 of the Act also requires the auditor to attest to and report on management’s assessment of effectiveness of the internal controls in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

Unexpected Fees and the Prediction of Material Weaknesses in Internal Control Over Financial Reporting

2016 ◽  
Vol 33 (4) ◽  
pp. 485-505 ◽  
Author(s):  
Susan M. Albring ◽  
Randal J. Elder ◽  
Xiaolu Xu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Financial Statement ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
New Material ◽  
Internal Control Weaknesses ◽  
Section 302

We investigate whether prior year unexpected audit fees help predict new material weaknesses in internal control over financial reporting reported under Section 404 of the Sarbanes–Oxley Act (SOX). Predicting material weaknesses may be useful to investors and other financial statement users because these disclosures have adverse economic impacts on disclosing firms. Unexpected fees are significantly associated with material weaknesses reported under Section 404, even after controlling for Section 302 disclosures and other factors associated with internal control weaknesses. Unexpected fees are associated with company-level weaknesses but are not significantly associated with account-specific weaknesses, consistent with differences in the nature and severity of the two types of material weaknesses. Our results are consistent with unexpected audit fees containing information on unobserved audit costs and client control risks, which help predict future internal control weaknesses.

scholarly journals The Goals and Promise of the Sarbanes–Oxley Act

2007 ◽  
Vol 21 (1) ◽  
pp. 91-116 ◽  
Author(s):  
John C Coates
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Public Institution ◽  
Section 404 ◽  
Public Companies ◽  
The Public ◽  
Corporate Scandals ◽  
Sarbanes Oxley ◽  
Public Company

The primary goal of the SarbanesOxley Act was to fix auditing of U.S. public companies, consistent with its full, official name: the Public Company Accounting Reform and Investor Protection Act of 2002. By consensus, auditing had been working poorly, and increasingly so. The most important, and most promising, part of SarbanesOxley was the creation of a unique, quasi-public institution to oversee and regulate auditing, the Public Company Accounting Oversight Board (PCAOB). In controversial section 404, the law also created new disclosure-based incentives for firms to spend money on internal controls, above increases that would have occurred after the corporate scandals of the early 2000s. In exchange for these higher costs, which have already fallen substantially, SarbanesOxley promises a variety of long-term benefits. Investors will face a lower risk of losses from fraud and theft, and benefit from more reliable financial reporting, greater transparency, and accountability. Public companies will pay a lower cost of capital, and the economy will benefit because of a better allocation of resources and faster growth. SarbanesOxley remains a work in progress -- section 404 in particular was implemented too aggressively - but reformers should push for continued improvements in its implementation, by PCAOB, rather than for repeal of the legislation itself.

Enriching AIS Courses With SOX Compliance Activities

2010 ◽  
Vol 5 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Joann Segovia ◽  
Carol M. Jessup ◽  
Marsha Weber ◽  
Sheri Erickson
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Controls ◽  
Accounting Profession ◽  
Investor Confidence ◽  
Reporting Requirements ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Significant Change

A very significant change to the accounting profession occurred in 2002 when the Sarbanes-Oxley Act of 2002 (SOX) was enacted. This legislation had a significant impact on corporations and their audit firms. The objective was to improve corporate governance and its quality of financial reporting to improve investor confidence. This paper provides instructors with a background on SOX and suggests readings and activities that reflect the requirements of SOX as it relates to the AIS environment and the analysis of internal controls. These activities can strengthen students' understandings of how corporations respond to the various reporting requirements of this Act.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

Sign in / Sign up

Export Citation Format

Share Document