The SOX 404 control audit and the effectiveness of additional audit effort in lowering the risk of financial misstatements

Chan Li (), K. K. Raman (), Lili Sun () and Rong Yang ()
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Chan Li: University of Pittsburgh
K. K. Raman: University of Texas at San Antonio
Lili Sun: University of North Texas
Rong Yang: Rochester Institute of Technology

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 3, No 7, 1009 pages

Abstract: Abstract We examine the effectiveness of additional audit effort in lowering the risk of financial misstatements for companies with internal control material weaknesses during three separate post-SOX time periods. Our findings suggest that additional audit effort (as proxied by abnormal audit fees) is effective in lowering the risk of financial misstatements for clients with weak internal controls during the Auditing Standard No. 2 regime (2004–2006), but not during the extant Auditing Standard No. 5 (AS5) regime or the earlier 2002–2004 pre-404 audit (but still post-SOX) time period. We contribute to the on-going debate about the potential benefits associated with the SOX 404 audit and, in particular, the emerging literature on the effectiveness, or lack thereof, of the SOX 404 audit in improving the assessment of control risk under the extant AS5 regime (Schroeder and Shepardson in Account Rev 91(5):1513–1541, 2016). Collectively, our findings are consistent with the notion that extant PCAOB concerns about internal control quality under AS5 may be valid.

Keywords: SOX 404 audit; AS2; AS5; Internal controls; Additional audit effort; Financial misstatements (search for similar items in EconPapers)
JEL-codes: M42 M48 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00814-7

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