Article2012

Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes‐Oxley Act?

20 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Abstract: This study examines whether compensation committees adjust CEO/CFO compensation using the auditor opinions on internal control effectiveness (SOX 404 opinions), and whether the emphasis on internal controls depends on the level of compensation committees’ financial expertise. Following SOX 404, a firm's CEO and CFO are required to evaluate the effectiveness of internal controls over financial reporting, subject to the auditor's attestation. In light of recent accounting fraud, we expect and find that compensation committees adjust CEO/CFO compensation by reference to the SOX 404 opinions. Using different measures of financial expertise, we also find that the relationship is more pronounced in firms with higher levels of financial expertise. Our results suggest the importance of including directors with financial expertise on compensation committees.

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1979Moral Hazard and Observability 2002Audit committee, board of director characteristics, and earnings management 1999Corporate governance, chief executive officer compensation, and firm performance 1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud 2008Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure 2005Equity Incentives and Earnings Management 2004The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management

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