The Economic Effects of SOX Section 404 Compliance: A Corporate Insider Perspective
Posted: 21 Jul 2010
Date Written: July 21, 2010
Abstract
Based on survey responses from 3,138 corporate insiders, we analyze the costs and benefits of compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The vast majority of respondents recognize at least some Section 404 compliance benefits, consistent with it being an effective governance mechanism. The evidence, however, suggests that Section 404 implementation is not generally perceived to improve efficiency. Insiders' perception about the net economic effects of Section 404 compliance varies directly with company size and it appears that large, more complex companies may benefit from Section 404 requirements at the expense of smaller ones, consistent with the criticism that a `one-size-ts-all' approach may not be desirable. Notwithstanding, the common view that Section 404 adds layers of financial reporting procedures to no avail seems to be overstated, and the evidence indicates that standardization by regulatory intervention is beneficial, as attested by the decrease in reported costs and concomitant increase in perceived net benefits following the 2007 reforms, regardless of company size.
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