An Analysis of the Costs and Benefits of Auditor Attestation of Internal Control over Financial Reporting

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

Abstract

We study the costs and benefits of Section 404(b) of the 2002 Sarbanes-Oxley Act. Section 404(b) requires a company’s auditor to audit management’s assessment of internal control over financial reporting (ICFR) for complying filers. We analyze the effects of Section 404(b) on compliance benefits (proxied by cost of debt), compliance costs (proxied by audit fees), and the net compliance benefit (proxied by Tobin’s q) using firm fixed effects regressions. Our results suggest that Section 404(b) decreases complying filers’ cost of debt while increasing compliance costs. However, there is a net compliance benefit since our results indicate an average increase in valuation premiums of 7.6% for filers complying Section 404(b).

Author

• Hongmei Jia, Louisiana Tech University