Is sOX 404(a) management internal control reporting an effective alternative to SOX 404(b) internal control audits?

Abstract

Section 404 of the Sarbanes-Oxley Act (SOX; U.S. House of Representatives 2002) continues to be controversial. Using samples of Securities and Exchange Commission (SEC) registrants with market capitalizations of less than $150 million, we find that non-accelerated filers have a significantly larger reduction in the likelihood of material misstatements, discretionary revenues, and discretionary accruals compared to smaller accelerated filers after non-accelerated filers became subject to the requirements of Section 404(a). Our findings are consistent with the argument that management reporting on internal controls (Section 404(a)) may be a cost-effective alternative to internal control audits (Section 404(b)) for smaller U.S. public companies.