Download or read book Market Reaction to Control Deficiency Disclosures Under the Sarbanes Oxley Act written by Parveen P. Gupta and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Sections 302 and 404 of the landmark Sarbanes-Oxley Act require firms to periodically assess and report control deficiencies to the audit committee as well as to the SEC. Section 302 specifically directs company management to identify and report control deficiencies while Section 404 provides the discipline that forces companies to take the control assessment and reporting task seriously. Importantly, external auditors are required to opine separately on the effectiveness of their client's system of internal control over financial reporting and issue an adverse opinion on internal control in the presence of even a single material weakness. Prior to being mandated by the Sarbanes-Oxley Act, management was not required to assess and report on the state of internal controls in their company. Statement on Auditing Standards (SAS) #60, which provided guidance to the external auditors on these matters, afforded them a great deal of flexibility and judgment not only in determining what constituted a reportable condition but also limited their disclosure only to the audit committee of the board. In a recent speech, Donald T. Nicolaisen, the SEC's Chief Accountant, remarks that these new requirements are not only a major financial but also a significant cultural endeavor for registrants in the U.S. and abroad. Consequently, these new requirements have drawn uproar and concern from companies of all sizes and market capitalization. Given the outcry from companies and regulatory assertions that these disclosures are the best thing that has ever happened to the capital markets, we examine whether such control deficiency disclosures convey valuation-relevant information to the market. This issue is important because increasing disclosure requirements without any attendant effect on valuation would impose unnecessary deadweight costs. The disclosures employed in our study were not mandatory under Section 404 at the time our sample firms made them. While there may be many reasons why our sample firms report these deficiencies early, these disclosures may portend the effect to be faced by other firms when the Section 404 rule becomes binding. Consistent with the regulatory assertions, we find that such disclosures are associated with a negative stock price reaction, on average, indicating that such disclosures do indeed convey valuation-relevant information. This reaction is mitigated to some extent, but not fully, if management also discloses that remediation steps have been taken to correct the weaknesses identified in the disclosures. Additionally, the price reaction is less negative for firms employing a Big Four auditing firm. Conversely, the reaction is more negative for firms with larger current liabilities relative to total assets, which suggests that control weaknesses may have implications for increased default risk.

Download or read book Market Uncertainty and Disclosure of Internal Control Deficiencies Under the Sarbanes Oxley Act written by Yongtae Kim and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines cross-sectional differences in stock market reactions to the disclosure of internal control deficiencies under Section 302 of the Sarbanes-Oxley Act. We hypothesize that the market punishment for internal control problems will be less severe for internal control disclosure that helps reduce market uncertainty around the disclosure. We also predict that such a relation is dependent on the types of disclosure and the market's prior knowledge of the credibility of firms' financial reporting. Consistent with our hypothesis, we find that when firms disclose their internal control deficiencies, their abnormal stock returns are negatively associated with changes in market uncertainty (e.g., changes in the standard deviations of daily stock returns) around the disclosure. We also find that the impact of the uncertainty reduction is greater for voluntary disclosures of non-material weakness, especially those made in the context of previous suspicious events. The negative impact of changes in market uncertainty on the abnormal stock returns remains intact even after controlling for possible simultaneity. An analysis using financial analysts' earnings forecasts dispersion as an alternative proxy for uncertainty confirms the results.

Download or read book Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses Under Section 302 of the Sarbanes Oxley Act of 2002 written by Jacqueline S. Hammersley and published by . This book was released on 2007 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: Under Section 302 of the Sarbanes Oxley Act, officers must evaluate the effectiveness of internal controls quarterly. We examine the stock price reaction to management's disclosure of internal control weaknesses and to their characteristics, controlling for other material announcements are made during the event window. We find evidence suggesting that some characteristics of the internal control weaknesses - their severity, management's conclusion regarding the effectiveness of the controls, their auditability, and how vague the disclosures are - are informative. In subsequent analyses, we find that the relation between returns and auditability holds for significant deficiencies and control deficiencies as well as for material weaknesses. However, the relation between returns and how vague the disclosure is is driven by the observations with material weaknesses. This suggests that the information content of internal control weakness disclosures depends on the severity of the internal control weakness.

Download or read book Stock Investors Response to Sox 404 Material Weakness Disclosures written by Maria Mirela Dobre and published by LAP Lambert Academic Publishing. This book was released on 2012-03 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt: Brief Synopsis: This paper investigates the market effects of Section 404 of the Sarbanes-Oxley Act by looking at the changes that the passage has brought in trader's information asymmetry, proxied by market makers' bid-ask spreads. Before the enactment of Sarbanes-Oxley, firms were only required to publicly disclose internal control deficiencies if there was a change in auditor. I hypothesize that if compliance with SOX 404 increases internal control over financial reporting, investor confidence in annual reports will also increase. Superior disclosures available to all traders lead to a reduction of information asymmetry. An increase in the quality of financial information should determine a narrowing of market maker's bid-ask spreads because the adverse selection cost is lower. I identify the cost components of the bid-ask spread for a sample of stocks surrounding the implementation of SOX 404. My expectation is that market makers react to the implementation of Section 404 as if information asymmetry has diminished, considering that the chances of trading against better informed traders are lower.

Download or read book Consequences of the Sarbanes Oxley Act Financial Accounting and Reporting Quality Capital Market written by Carolin Peters and published by Grin Publishing. This book was released on 2017-12-22 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2017 in the subject Business economics - Accounting and Taxes, grade: 1,7, University of Potsdam, language: English, abstract: The Sarbanes-Oxley Act (SOX) was introduced by President George W. Bush in the year 2002. This regulation changed disclosure and reporting requirements and aims to increase trust of the investors in capital markets again, after facing several balance and accounting scandals between the years 2000 and 2002, for example at Enron and WorldCom . The SOX affects companies with a registration at the Securities and Exchange Commission (SEC). There are two sections that are considered having a high impact on the corporate governance of complying firms, Section 302 (SOX 302) and Section 404 (SOX 404). SOX 302 - "Corporate Responsibility for Financial Reports"- demands the executives to assess whether firms' financial statements represent the financial situation and the results of the operations and the period. Executives should design, establish and maintain internal controls. An evaluation of the effectiveness, disclosures of deficiencies concerning internal controls, frauds et cetera is necessary (SOX, 2002, Section 302). SOX 404 - "Management Assessment of Internal Controls"- extends prior requirements and demands that the company's external auditor must report on the reliability of management's assessment of internal control every fiscal year. It also requires an annual attestation by the management that evaluates the reliability of financial statements (SOX, 2002, Section 404). Especially SOX 404 is considered a cost driver of the SOX and demands significant changes in financial reporting. Aim of SOX 302 and 404 is to improve internal controls, and to reduce opportunistic behaviour of executives. Prior studies show evidence that there seem to be differences between the perceived benefits and the target effects of the SOX, for example regarding audit quality after the SOX. Furthermore, there is a discussion question

Download or read book Market Reactions to the Disclosure of Internal Control Weaknesses Under the Japanese Sarbanes Oxley Act of 2006 written by Hiroyasu Kawanishi and published by . This book was released on 2016 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article investigates how the stock market reacts to the disclosure of internal control deficiencies under the Japanese Sarbanes-Oxley Act of 2006. Given the Japanese official agencies' attempts to minimize negative shocks, we find no stock market reactions on the whole to the disclosure of internal control weaknesses. We also show that negative market reactions are likely to be intensified if firms have changed auditors in recent years, have uncertainties over their ability to continue as a going concern, have larger assets or fixed debts, or are listed on the emerging stock exchanges. In contrast, negative stock reactions can be mitigated when firms have high ratios of foreign shareholders or current liabilities. Another interesting finding is that whether a firm engages a Big 4 audit firm does not seem to matter to investors evaluating firms with internal control weaknesses.

Download or read book SOX 404 for Small Publicly Held Companies written by Robert J. Sonnelitter, Jr. and published by CCH. This book was released on 2007 with total page 438 pages. Available in PDF, EPUB and Kindle. Book excerpt: CCH's SOX 404 for Small, Publicly Held Companies enables you to successfully and efficiently make the internal control assessment required by Section 404 of the Sarbanes-Oxley Act. In particular, this book will help non-accelerated filers-those companies that have outstanding securities with a market value of less than $75 million-with the challenging and time-consuming SOX 404 requirements. This addition to the CCH reference library gives you the tools for the evaluation, planning documentation, risk assessment, testing, and reporting necessary for successful compliance with Section 404. It focuses on the SEC's rules for an assessment of internal controls and the PCAOB's requirements for independent auditors. The free, companion CD-ROM accompanying this book includes workpapers and checklists as well as primary source material from the SEC and PCAOB to make your research and reporting as quick and cost-efficient as possible. SOX 404 for Small, Publicly Held Companies and the accompanying CD-ROM address all that is necessary to perform an assessment of internal controls over financial reporting as well as an assessment of disclosure controls. Book jacket.

Download or read book The Impact of the Sarbanes Oxley Act written by United States. Congress. House. Committee on Financial Services and published by . This book was released on 2005 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Regulatory Monitoring Under the Sarbanes Oxley Act written by Cindy R. Alexander and published by . This book was released on 2007 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the economic relevance of the factors set forth under Section 408 of the Sarbanes-Oxley Act to guide the enhanced regulatory scrutiny of public company financial disclosures, as required under the Act. We interpret two of the factors, volatility and firm size, as predictors of a public company's relative risk of non-compliance or the prospective loss to investors, conditional upon non-compliance. We use disclosures of material weaknesses in internal controls under Section 404 as indicators of the potential for non-compliance. Our evidence is that the Section 408 factors that we associate with a relatively high risk of non-compliance - high stock-price volatility, and whether a company is emerging with a disparate PE ratio - are good predictors of reported material weaknesses in internal controls. In addition, while Section 408 calls for enhanced review of large firms - those with high market capitalization and a material affect on the economy - we find that relatively few large firms have disclosed material weaknesses in internal controls. The large firms that have disclosed material weaknesses, however, comprise 92% of the market capitalization of all companies disclosing a material weakness. In contrast with the focus of the public debate on the compliance problems of smaller public companies, our evidence points to high volatility as a stronger predictor of compliance problems under the Act than small firm size. Finally, we discuss alternate explanations for our findings and the potential for unintended consequences for shareholders.

Download or read book Acquirer Internal Control Weaknesses in the Market for Corporate Control written by Masako N. Darrough and published by . This book was released on 2017 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how disclosures regarding internal controls, required by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (SOX), affect the market for corporate control. We hypothesize that acquirers with internal control weaknesses (ICWs) make suboptimal acquisition decisions based on poor quality information generated by their ineffective controls over financial reporting. We expect that such acquirers will be more likely to misestimate the value of their targets or the potential synergies from mergers, thereby overpaying for completed deals. Using a treatment sample of acquisitions made by acquirers that have disclosed ICWs and two matched control samples without ICW disclosures, we document that ICW acquirers experience a substantially more negative market response to acquisition announcements and have lower future performance than the two matched control samples without ICW disclosures. Overall, our results suggest that ineffective internal controls hinder decision-making related to mergers and acquisitions (M&A).

Download or read book Internal Control Weakness and Cost of Equity written by Maria Ogneva and published by . This book was released on 2012 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Section 404 of the Sarbanes-Oxley Act (SOX) requires every company to report on the effectiveness of internal controls over financial reporting. Section 404 has arguably been the most controversial provision of SOX, with many registrants complaining that the high cost of compliance outweighs its benefits. In contrast, the SEC and others have argued that the Section 404 provisions are beneficial to the capital markets and will eventually reduce the cost of capital. In this paper, we examine the association between implied cost of equity and internal control effectiveness for firms that filed Section 404 reports with the SEC. We find marginally higher cost of equity for firms disclosing material weakness in internal controls than for a sample of firms disclosing no material weaknesses. The differences in cost of equity disappear after controlling for firm characteristics associated with firms disclosing material weaknesses. Overall, our results are consistent with internal control weakness identified under Section 404 not being directly associated, on average, with higher implied cost of equity.

Download or read book Disclosure of Internal Control Weaknesses and the Capital Market Valuation of Earnings Surprise After the Sarbanes Oxley Act Of 2002 written by Qi Wang and published by . This book was released on 2017-01-27 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Disclosure of Material Weaknesses in Internal Control After the Sarbanes Oxley Act written by Weili Ge and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper focuses on a sample of 261 companies that have disclosed at least one material weakness in internal control in their SEC filings after the effective date of the Sarbanes-Oxley Act of 2002. Based on the descriptive material weakness disclosures provided by management, we find that poor internal control is usually related to an insufficient commitment of resources for accounting controls. Material weaknesses in internal control tend to be related to deficient revenue recognition policies, lack of segregation of duties, deficiencies in the period-end reporting process and accounting policies, and inappropriate account reconciliation. The most common account-specific material weaknesses occur in the current accrual accounts, such as the accounts receivable and inventory accounts. Material weakness disclosures by management also frequently describe internal control problems in complex accounts, such as the derivative and income tax accounts. In our statistical analysis, we find that disclosing a material weakness is positively associated with business complexity (e.g., multiple segments and foreign currency), negatively associated with firm size (e.g., market capitalization), and negatively associated with firm profitability (e.g., return on assets).

Download or read book Audit Reports and Stock Markets written by Kim Ittonen and published by University of Vaasa. This book was released on 2009 with total page 211 pages. Available in PDF, EPUB and Kindle. Book excerpt: Tiivistelmä: Tilintarkastuskertomukset ja osakemarkkinat.

Download or read book Handbook of Finance written by Frank J. Fabozzi and published by . This book was released on 2008-10-06 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "The Handbook of Finance is a comprehensive 3-Volume Set that covers both established and cutting-edge theories and developments in finance and investing. Edited by Frank Fabozzi, this set includes valuable insights from global financial experts as well as academics with extensive experience in this field. Organized by topic, this comprehensive resource contains complete coverage of essential issues—from portfolio construction and risk management to fixed income securities and foreign exchange—and provides readers with a balanced understanding of today’s dynamic world of finance. A brief look at each volume: Volume I: Financial Markets and Instruments skillfully covers the general characteristics of different asset classes, derivative instruments, the markets in which financial instruments trade, and the players in those markets. Volume II: Investment Management and Financial Management focuses on the theories, decisions, and implementations aspects associated with both financial management and investment management. Volume III Valuation, Financial Modeling, and Quantitative Tools contains the most comprehensive coverage of the analytical tools, risk measurement methods, and valuation techniques currently used in the field of finance."

Download or read book The world price of earnings opacity written by Uptal Bhattacharya and published by . This book was released on 2002 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Disclosure of Internal Control Weaknesses and the Capital Market Valuation of Earnings Surprise After the Sarbanes Oxley Act of 2002 written by Qi Wang (M. Phil.) and published by . This book was released on 2008 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: