Of SOX’s many requirements, the main one for this study is Section 404, “Enhanced Financial Disclosures, and Management Assessment of Internal Control. Section 404 requires companies to assess the effectiveness of their internal controls over financial reporting and report that assessment in their annual filings with the SEC (Form 10-K) . Moreover, companies’ external auditors will not only audit the financial statements, as before, but now they will also audit management’s assessment of their internal controls over financial reporting and perform their own independent audit of the same control system. Prior to SOX, auditors’ assessed internal controls but only in conjunction with planning the audit, i.e., they did not formally audit the internal control system, nor formally report on the results of that audit.
Although a major purpose of the internal control audit is deterrence from fraudulent financial reporting, the ramifications of which include severe market reactions and legal liabilities, regulators also maintain that better internal control will have broader favorable impacts on companies, such as reduced cost of capital and better access to capital markets.
For instance, to underscore the possible positive benefits of Section 404, William Donaldson, Chairman of the SEC remarked, simply complying with the rules is not enough. [Companies] should, as I have said before, make this approach part of their ... DNA. For companies that take this approach, most of the major concerns about compliance disappear. Moreover, if companies view the new laws as opportunities — opportunities to improve internal controls, improve the performance of the board, and improve their public reporting — they will ultimately be better run, more transparent, and therefore more attractive to investors. (Speech at the National Press Club on July 30, 2003).
Notwithstanding the alleged benefits, the本文来自优.文,论-文·网原文请找腾讯324.9114 private costs are not insignificant and are likely to become a permanent addition to firms’ administrative burden. In a survey of 224 firms conducted by Financial Executives International (in July 2004),
祝福网页 respondents revealed that they will spend in the first year of SOX, on average, an extra $3 million in order to comply with Section 404. The largest companies (those with over $5,000 million in revenues) will spend an average of $8 million. Respondents stated that audit fees are expected to increase, on average, by 53% in order to pay for the attestation over internal control. The professional accounting firms are admonishing clients about the importance of subsequent steps to insure sustainability of the control system so that “backsliding” will not occur. (Deloitte and Touche, 2005). Additionally, the costs associated with these steps include not only “out-of-pocket” costs but also the indirect costs of diverting managerial attention from the critical decisions that
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