Internal control under Sarbanes‐Oxley: a critical examination

Purpose - The financial reporting requirements for publicly traded companies have undergone a significant transformation due to the passage of the Sarbanes‐Oxley Act (SOX). Companies are now required to report on the operating effectiveness of their internal controls over financial reporting. Additionally, the independent auditor is required to assess and report on the effectiveness of their client's internal controls, and they must attest to management's internal control assessment. The purpose of this paper is to examine the costs and benefits associated with Section 404 of the SOX of 2002. Design/methodology/approach - Qualitative analysis and deductive reasoning are used to evaluate the net benefits of Section 404 to the securities markets. Findings - Qualitative analysis demonstrates that the new internal control reporting requirements have negative net benefits to the securities markets because of excessive cost and ambiguous interpretation. Elimination of formal internal control reporting is recommended. Originality/value - This paper demonstrates that major revisions of Section 404 of the SOX are desirable for optimal allocation of resources related to financial reporting.