Article2009

The impact of Sarbanes‐Oxley on internal control remediation

Kam C. Chan · Gary Kleinman · Picheng Lee

33 citations0/0 files storedInternational Journal of Accounting and Information Management

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

Abstract

Purpose The purpose of this paper is to examine the determinants of internal control weakness remediation revealed under Sarbanes‐Oxley (SOX) section 404 reporting requirements. Design/methodology/approach Data on firms that reported internal control weaknesses for fiscal year 2004 are collected, and determined whether these weaknesses still existed in their 2005 filings. Logistic regression is used to examine the impact of corporate governance, resource, impediments (e.g. severity of weakness), and Big 4 auditor status on remediation completion. Findings Resources (e.g. size, ROA) were positively associated with remediation. Use of Big 4 auditor, more audit committee meetings, more business segments, and filing lag were negatively associated with remediation, as were number and type of internal control weaknesses. Research limitations/implications First, the paper sheds light on the individual firm factors that influence corporate response to the legal and social (e.g. public pressure) environment facing firms. Understanding this should better enable policy makers and regulators to foresee where potential lags in firm implementation of regulations may occur, and why. Second, it believes that the paper also sheds light on the relative value of different corporate governance structures in meeting investor concerns for proper stewardship of their investments. Finally, this paper provides information of use to other corporate governance researchers in that the results suggest the overwhelming importance of the legal and social environment in influencing corporate behavior. However, this paper does not address the contribution of national culture, financial and audit‐related reporting requirements, and differences in firm resources, to corporate behavior. Originality/value The paper deepens the field's understanding of the determinants of internal control weakness remediation, furthering regulators' understanding of SOX's impact.

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References

1995Institutions and organizations 1998The Effect of Audit Quality on Earnings Management*2004Board characteristics, accounting report integrity, and the cost of debt 2007Determinants of weaknesses in internal control over financial reporting 2005Audit Committee Quality and Internal Control: An Empirical Analysis 2006The discovery and reporting of internal control deficiencies prior to SOX-mandated audits 2010Financial executive qualifications, financial executive turnover, and adverse SOX 404 opinions 2006The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era

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