This study examines companies' costs to comply with SOX 404 and identifies factors that are associated with these costs. SOX 404 costs can be classified into three categories: internal labor costs, external consulting and technology expenses, and auditor attestation charges. While prior research has examined audit fees associated with SOX 404, we examine both total costs and auditor attestation costs associated with SOX 404. Based on a sample of companies that voluntarily disclosed SOX 404 cost information during the period from January 2003 to September 2005, we find that the mean (median) total compliance costs for Section 404 is $2.2 ($1.2) million. Regression analyses indicate that the total compliance costs are positively associated with firm size, the presence of material internal control weaknesses, the cost of setting up new computer systems and establishing formal internal control policies, the involvement of large auditors, the appointment of new CEOs, and are negatively associated with firms in regulated industries and firms that raised new financing. Firm size and the incidence of material weaknesses are also the drivers of SOX 404 audit costs, one component of total SOX 404 costs.
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1 May 2008
Research Article|
May 01 2008
Costs to Comply with SOX Section 404
Jagan Krishnan;
Jagan Krishnan
aProfessor at Temple University.
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Dasaratha Rama;
Dasaratha Rama
bProfessor at Florida International University.
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Yinghong Zhang
Yinghong Zhang
cPh.D. Student at Temple University.
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Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
2008
AUDITING: A Journal of Practice & Theory (2008) 27 (1): 169–186.
Citation
Jagan Krishnan, Dasaratha Rama, Yinghong Zhang; Costs to Comply with SOX Section 404. AUDITING: A Journal of Practice & Theory 1 May 2008; 27 (1): 169–186. https://doi.org/10.2308/aud.2008.27.1.169
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