An Analysis and Taxonomy of Disclosure Controls and Procedures Effectiveness

Abstract

SUMMARY With the passage of the Sarbanes-Oxley Act, there has been much discussion and analysis of Section 404 dealing with management's and the external auditor's evaluation of internal controls over financial reporting (ICFR). However, Section 302 of the Act requires management to evaluate their disclosure controls and procedures (DC&P) and report on the effectiveness of such controls in their 10-Q and 10-K filings. This paper explains the SEC's differentiation of ICFR and DC&P and attempts to report on the effectiveness of DC&P utilizing the Audit Analytics database. The data show that DC&P have been ineffective, as reported by management in their 10-K filings, ranging from a low of 13.75 percent to a high of 33.91 percent of observations over the 11-year period from 2004 through 2014. The paper concludes with potential research issues related to DC&P.