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The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity

Journal of accounting research, 2009-03, Vol.47 (1), p.1-43 [Peer Reviewed Journal]

Copyright 2009 The Institute of Professional Accounting at The University of Chicago Booth School of Business ;University of Chicago on behalf of the Institute of Professional Accounting, 2008 ;2009 The Institute of Professional Accounting at the University of Chicago Booth School of Business ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679X.2008.00315.x ;CODEN: JACRBR

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Title:
The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity
Author: ASHBAUGH-SKAIFE, HOLLIS ; COLLINS, DANIEL W. ; KINNEY JR, WILLIAM R. ; LAFOND, RYAN
Subjects: Accounting procedures ; Auditing ; Business accounting ; Capital costs ; Cash flow ; Coefficients ; Cost accounting ; Cost estimates ; Cost of equity ; Descriptive statistics ; Equity ; Expected returns ; Financial accounting ; Financial reporting ; Internal audits ; Internal controls ; International Statistical Classification of Diseases ; Modeling ; Public Company Accounting Reform & Investor Protection Act 2002-US ; Risk assessment ; Sarbanes-Oxley Act ; Studies ; U.S.A
Is Part Of: Journal of accounting research, 2009-03, Vol.47 (1), p.1-43
Description: The Sarbanes-Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre-SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor-confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross-sectional and intertemporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity.
Publisher: Malden, USA: Blackwell Publishing Inc
Language: English
Identifier: ISSN: 0021-8456
EISSN: 1475-679X
DOI: 10.1111/j.1475-679X.2008.00315.x
CODEN: JACRBR
Source: Alma/SFX Local Collection
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The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity

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