Do Both SOX 404 and AS5 Reduce ICFR Disclosure Errors?

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 8: Auditing Effects on Reporting Delays/Errors

Abstract

This study is to examine both of the impacts of SOX 404 and AS5 on ICFR disclosure errors. We regard restatement companies as those with weak internal controls and they should be more likely to receive adverse ICFR opinions and vice versa. We presume that deterioration in ICFR disclosure quality is shown by an increase in the likelihood of TypeⅡerrors that an effective ICFR is concluded by a company which subsequently restates its financial reports, or an increase in the likelihood of TypeⅠerrors that an ineffective ICFR is concluded by a company which does not subsequently restate its financial reports. Our evidence indicates that the enactment of SOX 404 reduces TypeⅡerrors of ICFR disclosures without the side effect of increasing TypeⅠerrors. In addition, we find that while the more flexible and laxer AS5 can enhance the efficiency of ICFR audits by reducing TypeⅠerrors, it inadvertently lowers public ICFR disclosure quality measured by increased Type Ⅱ errors.

Authors

• Hsien-Lian Chiu, National Chengchi University

• Ling-Tai Lynette Chou, National Chengchi University