An Exploration of the Choice to Voluntarily Comply with SOX Section 404(b)

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 1: Internal Controls over Financial Reporting

Abstract

Central to the Sarbanes-Oxley Act was a requirement that every company have an audit of its internal control over financial reporting. However, there were also concerns that this requirement was overly burdensome, from a financial perspective, for small businesses. This concern promoted several delays in enforcing the law for small companies and ultimately caused congress to permanently exempt small businesses. Yet there are some small companies that voluntarily elect to comply with the law. We explore why these companies elect to incur these costly audits. We document that small companies getting audits of internal controls may be doing so to restore investor confidence after reporting failures, to appear credible prior to raising funds, as a response to organizational changes, or in anticipation of being required to comply.

Authors

• Jason E. MacGregor, Baylor University

• David N. Hurtt, Baylor University

• Alan I. Blankley, The University of North Carolina at Charlotte