Investor Perceptions of Auditor Reports Under Section 404 of the Sarbanes-Oxley Act

Posted: 25 Sep 2007

See all articles by Jayanthi Krishnan

Jayanthi Krishnan

Temple University - Department of Accounting

Heibatollah Sami

Lehigh University

Haiyan Zhou

University of Texas - Pan American

Date Written: 2007

Abstract

Section 404 of the Sarbanes-Oxley Act requires firms to assess the effectiveness of internal controls over financial reporting and auditors to express an opinion on the effectiveness of such internal controls. We examine whether the first-time inclusion of additional audited information in Section 404 company filings were associated with higher earnings response coefficients (ERC) for accelerated filers. We find that the ERCs of companies with clean internal control reports were greater in the SOX 404 year of adoption than in the previous year. However, there is no difference in the ERCs in the two years for companies with material weaknesses. We interpret these results as indicating that even clean Section 404 reports - which form a majority of all internal control reports - contribute positively to investor perceptions about the quality of financial reporting.

Keywords: Internal Control, Earnings Response Coefficient, Section 404, Sarbanes-Oxley, Accelerated Filer

JEL Classification: G14, G34, G38, M41, M49

Suggested Citation

Krishnan, Jayanthi and Sami, Heibatollah and Zhou, Haiyan, Investor Perceptions of Auditor Reports Under Section 404 of the Sarbanes-Oxley Act (2007). Available at SSRN: https://ssrn.com/abstract=1016710

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

Haiyan Zhou

University of Texas - Pan American ( email )

1201 West University Drive
Edinburg, TX 78539
United States
956-381-3334 (Phone)
956-381-2407 (Fax)

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