How Readable are SOX 404 Reports?

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Abstract

This study examines all SOX 404 reports issued between 2004 and 2014 to determine their readability as measured by the FOG index. We find that managements' reports are more readable than auditors' reports. Large companies' auditors’ reports are less readable but managements’ reports are more readable as are managements’ reports for more complex companies’ and companies’ with growth options. Regulated industry reports (utilities and financial sectors) are less readable than other reports. Big 6 reports are less readable than non-Big 6 reports. Among the Big 4 firms, two firms issued significantly more readable reports than the others. The readability of reports improved, albeit only slightly, after Auditing Standard (AS) No. 5 (PCAOB 2007) was issued. Reports without weaknesses are less readable than reports with weaknesses, which we attribute to the proportion of boilerplate relative to actual content in those reports. Reports containing entity level weaknesses are significantly more readable than other reports..

Authors

• J Efrim Boritz, University of Waterloo

• Beverly Louise Hayes, University of Waterloo

• Lev Timoshenko, University of Waterloo