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Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms’ internal control disclosures

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  • Ge, Weili
  • Koester, Allison
  • McVay, Sarah

Abstract

We quantify measurable benefits and costs of exempting firms from auditor oversight of internal control effectiveness disclosures. We measure the benefit of exemption as an aggregate $388 million in audit fee savings from 2007–2014. The costs stem from internal control misreporting: an aggregate $719 million of lower operating performance due to non-remediation and a $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls. The audit fee savings benefit shareholders of all exempt firms, whereas the costs are borne by shareholders of only a fraction of exempt firms (the internal control misreporters).

Suggested Citation

  • Ge, Weili & Koester, Allison & McVay, Sarah, 2017. "Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms’ internal control disclosures," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 358-384.
    • Handle: RePEc:eee:jaecon:v:63:y:2017:i:2:p:358-384
    DOI: 10.1016/j.jacceco.2017.01.001
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    4. Makomborero Bure & Robertson K. Tengeh, 2019. "Implementation of internal controls and the sustainability of SMEs in Harare in Zimbabwe," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(1), pages 201-218, September.
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    10. Moehrle, Stephen R. & Meckfessel, Michele & Reynolds-Moehrle, Jennifer & Stuerke, Pamela & Wen, He, 2018. "Developments in accounting regulation: A synthesis and annotated bibliography of evidence and commentary in the 2017 academic literature," Research in Accounting Regulation, Elsevier, vol. 30(2), pages 138-147.
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    13. Todd D. Kravet & Sarah E. McVay & David P. Weber, 2018. "Costs and benefits of internal control audits: evidence from M&A transactions," Review of Accounting Studies, Springer, vol. 23(4), pages 1389-1423, December.
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