Provisions Of SOX Research Articles

Effect of Sec Enforcement Actions on CEO and Cfo Forced Turnovers: Evidence Associated with Sox Provisions

Effect of Sec Enforcement Actions on CEO and Cfo Forced Turnovers: Evidence Associated with Sox Provisions

Post-SOX downward auditor switches and their impacts on the nonprofit audit market

This study examines the extent of downward auditor switches from Big 4 audit firms by nonprofit organizations (NPOs) after enactment of the Sarbanes-Oxley Act (SOX). Although SOX provisions do not directly apply to nonprofit organizations, capacity constraints and client realignments due to SOX may have reduced the Big 4 presence in the nonprofit audit market. We find that downward switches from a Big 4 firm increased in the post-SOX period. Universities and colleges are more likely than other NPOs to have downward switches from a Big 4 audit firm in the post-SOX period compared to the pre-SOX period. These results suggest that SOX had differential impacts on NPOs depending on the nature of the organization. Risky NPOs, as indicated by the existence of internal control deficiencies, were more likely to have downward auditor switches. NPOs are more likely to choose a non-Big 4 specialist following a downward switch compared to other NPOs with non-Big 4 auditors, consistent with higher demand for audit quality by these organizations. We do not find significant evidence that downward switches for these organizations are associated with decreases in subsequent donations. However, we find that downward switchers are associated with increases in material weaknesses in internal control.

The risk implication of Sarbanes-Oxley Act of 2002: an empirical examination of the US financial services industry

This article examines the risk effect of the Sarbanes-Oxley Act of 2002 (SOX) for the US financial services (FS) industry. The major provisions of SOX relate to increased transparency of the financial reporting system and improved internal governance of firms. The overall results support that SOX reduced the total risk and idiosyncratic risk of FS firms, particularly of banks, savings and insurance companies. Yet, this article finds an increase in systematic risk of banks, savings and insurance companies. This outcome may be due to increased financial integration, innovation, globalization and deregulation.

Clubs' Adoption of the Sarbanes-Oxley Act

ABSTRACT This paper attempts to determine the extent to which clubs have adopted some of the various measures of the Sarbanes-Oxley Act. In order to make this determination, a study was conducted that involved 179 club executives. The club executives reported the extent to which their clubs were in compliance with various aspects of SOX. In addition, the demographic data collected were analyzed in relation to the responses to the SOX provisions. This analysis determined whether the size of clubs in revenues and based on number of members and profitability affected the adoption of various measures of SOX.

2002 Sarbanes-Oxley Act: Privately-Held Companies Implementation Issues

<p class="MsoNormal" style="text-align: justify; margin: 0in 31.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Our research was designed to for two purposes: (1) if the provisions of SOX have merit on their own or whether it is just a mandate by legislators, and (2) to determine if privately-held companies currently not required to implement SOX have done so.<span style="mso-spacerun: yes;">  </span>In summary, the respondents, who were experienced financial executives with knowledge of SOX and other regulatory governance policies see SOX as an influential piece of legislation.<span style="mso-spacerun: yes;">  </span>They see some positive benefits to their organizations with implementation of some of the provisions of the act, such as better financing options, better credit opportunities, and opportunities to take the company public.<span style="mso-spacerun: yes;">  </span>Many of financial executives indicated their organizations are implementing provisions in areas where it cost effective as well making “good” business sense.<span style="mso-spacerun: yes;">  </span>For example, it is cost effective to implement a formal code of professional conduct for the executives and it does make good business sense.<span style="mso-spacerun: yes;">  </span>However they are not asking their CEOs or CFOs to certify the accuracy of financial statements nor to the internal control structure.<span style="mso-spacerun: yes;">  </span>Many of the financial managers indicated they are not implementing SOX on a full scale basis because of the cost, time, and that the lack of benefits derived from implementation.</span></span></p>

Has SOX Affected the Association between Fee Dependence and Auditors’ Going-Concern Opinions?

Recently, Li (2009) reports that an auditor’s going-concern decision is unaffected by pressure from her economically important clients in 2001, but is positively affected in 2003. Li attributes these findings to enhanced auditor independence under the Sarbanes-Oxley Act (SOX) of 2002. However, this interpretation seems premature, as failures to issue going-concern reservation are generally regarded as a serious violation of independence which auditors will try and avoid even before the passage of SOX. Moreover, several audit-related SOX provisions did not become effective until 2003. Our study sheds light on Li’s (2009) surprising findings by extending her post-SOX period to 2007 and conducting parallel analyses using a more comprehensive logistic regression model developed by DeFond, Raghunandan and Subramanyam (2002). Unlike Li (2009), we fail to find any association between the incidence of going-concern opinions and economic bonding using either model in 2004–2007. Her findings for 2003 are also very sensitive to model specification and sample choice. We then add to the models an interaction term between economic bonding and an indicator variable, denoting firms with high non-audit service fees in 2001 and hence most affected by SOX. This term is insignificant in 2003–2007, implying that SOX has not improved independence even for targeted firms. Expanding Li’s model to include five additional control variables in DeFond et al. (2002) yields qualitatively similar results as DeFond et al. Thus, the phenomena identified by Li (2009) appear to reflect auditors’ response to the aftermath of accounting scandals and/or the publicity surrounding SOX.

How accounting fraud has changed merger valuation

The accounting fraud of Enron and other firms prompted acquirers to be more diligent before investing in companies. The fraud also led to the creation of the Sarbanes–Oxley Act (SOX), which contains provisions that require more due diligence for firms that pursue mergers. We document significant changes in the behaviour and valuation of mergers since SOX. Acquirers rely more heavily on financial and legal advisors, while targets rely more heavily on financial advisors. The total premium (which includes the target's stock price run up) that acquirers pay for targets is significantly lower since SOX. The long-term stock price performance following mergers is more favourable (or less unfavourable) since SOX, regardless of the horizon used to measure long-term stock price performance. Whether the more conservative pursuit of targets by acquirers is voluntary or forced by SOX provisions, acquirer decision making has improved since the accounting fraud.

Sarbanes-Oxley and corporate risk-taking

We empirically examine whether risk-taking by publicly traded US companies declined significantly after adoption of the Sarbanes-Oxley Act of 2002 (SOX). Several provisions of SOX are likely to discourage risk-taking, including an expanded role for independent directors, an increase in director and officer liability, and rules related to internal controls. We find several measures of risk-taking decline significantly for US versus non-US firms after SOX. The magnitudes of the declines are related to several firm characteristics, including pre-SOX board structure, firm size, and R&D expenditures. The evidence is consistent with the proposition that SOX discourages risk-taking by public US companies.

The Pricing of IPOs Post‐Sarbanes‐Oxley

AbstractThe Sarbanes‐Oxley Act (SOX) imposes new requirements for firms going public. Many provisions of SOX should improve the transparency of U.S. firms going public and therefore reduce the uncertainty surrounding their valuation. We find that initial returns of initial public offerings (IPOs) in the United States have declined since SOX. Furthermore, the aftermarket performance of IPOs since SOX is significantly higher. While the expense of public reporting has increased in the United States because of SOX, the valuations of newly public firms at the time of the IPO are subject to less uncertainty and smaller aftermarket corrections.

Investor Perceptions of the Earnings Quality Consequences of Hiring an Affiliated Auditor

The Sarbanes-Oxley Act of 2002 (SOX) proscribes so-called “affiliated hires” of financial executives. More specifically, SOX requires that firms wait at least one year before hiring an individual recently employed as a member of the firm’s external audit team. The intent of the regulation is to reduce the perceived loss of auditor independence due to affiliated hiring. SOX provisions also require that firms establish fully independent audit committees and disclose the identity of directors with financial expertise. Using a sample of firms that employ new financial executives during the period leading up to SOX, we find that earnings response coefficients (ERCs) computed using quarterly data decline following hires of individuals recently employed by the firm’s external auditor, but ERCs do not decline following hires of comparably qualified financial executives not recently employed by the external auditor. We also find that ERC declines following affiliated hires are statistically significant for firms with audit committee compositions inconsistent with SOX regulation, but not for firms with audit committees consistent with SOX regulation subsequently imposed. Further investigation using measures of earnings quality employed in prior studies suggests that the documented differences in ERC changes are attributable to perceived, rather than real, changes in earnings quality following affiliated hires.

The impact of SOX on securities fraud class action dismissals

Many have criticised the high cost of implementing the provisions of the Sarbanes–Oxley Act of 2002 (SOX — eg complying with Section 404, implementing enhanced corporate governance measures). In this paper, we investigate a potential benefit of SOX, an increase in the frequency of successful motions to dismiss in securities fraud class action lawsuits. A securities class action lawsuit is a significant event for a publicly traded company. The potential for damages and the adverse publicity from securities litigation is significant and the utilisation of scarce resources to defend, as well as the ensuing settlement amounts, can be substantial. A court's decision to grant or deny a request for dismissal either absolves the defendant from future legal liability, or virtually assures that settlements will be made or damages will be paid. If the corporate governance, oversight, and disclosure enhancing provisions of SOX are successful, we would expect the likelihood of successful motions to dismiss would increase. Based on our empirical analyses, it appears as though the frequency of defendants’ successful motions to dismiss securities class action lawsuits has increased, suggesting that although the cost of complying with SOX may be great, at least one of its benefits may exceed its costs.

Sarbanes-Oxley and Corporate Risk-Taking

This paper empirically examines whether the Sarbanes-Oxley Act of 2002 (SOX) discourages risk-taking by publicly traded U.S. companies. Several provisions of SOX are likely to have this effect, including an expanded role for independent directors, an increase in director and officer liability, and rules related to internal controls. We find that several measures of risk-taking decline significantly for U.S. companies as compared with U.K. firms after SOX. The declines are related to several firm characteristics, including pre-SOX board structure, firm size, and R&D expenditures. In addition, the likelihood of initial public offerings (IPOs) occurring in the U.S. versus the U.K. declined significantly after SOX, with the decline being significantly higher for R&D intensive industries. Overall, the evidence supports the proposition that SOX discourages risk-taking by public U.S. companies.

The Missing Link in Sarbanes-Oxley: Enactment of the 'Change of Control Board' Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions

This paper builds upon on my 2000 article, Change of Control Board: Federal Preemption of the Law Governing a Target's Directors (2000 COCB Article). In that article I propose that Congress address the conflicts of interest that can arise in the acquisition of a publicly held target corporation in various types of hostile and consensual merger and acquisition (M&A) transactions by requiring the independent appointment of a disinterested Change of Control Board. Under this proposal, unless the shareholders elect-out, once a public corporation becomes a target of a bona fide M&A offer, a federal Change of Control Official would appoint for the target a three-person Change of Control Board, which would have complete authority over the acquisition process. This concept would override all state takeover laws, and because of the obvious independence of the Change of Control Board, a Federal uniform standard of review, the business judgment rule, would apply in determining if the board acted properly. Thus, this concept would eliminate the several confusing standards of review applicable to the actions of a target's directors in M&A transactions under Delaware law. Many features of the Change of Control Board concept are similar to those provided for audit committees in the Sarbanes-Oxley Act of 2002 (SOX). The audit committee is directly responsible for dealing with the firm's CPA, each member of the audit committee must be independent, and the audit committee has the authority to hire its own advisors. Also, the U.S. stock exchanges have promulgated rules requiring that the boards of directors of each listed company consist of a majority of independent directors. Although these independence requirements move in the right direction, they do not properly address issues that can arise when a publicly held corporation engages in a M&A transaction. The continuing problem with the acquisition of publicly held targets is illustrated most recently in two 2007 cases in the Delaware Chancery Court: Caremark and Netsmart, and the problem with acquirors is illustrated in the 2006 decision of this Court in J.P. Morgan Chase. This article first explains how the audit committee provisions of SOX and the independent director requirement of the exchanges build upon a previous proposal for federalization of certain aspects of corporate law. The article then discusses (1) the manner in which current state law deals inadequately with various types of conflicts of interest that can arise in mergers and acquisitions, and (2) the bizarre structure of state anti-takeover law under which some states provide boards with virtually unlimited power to block a hostile acquisition. After explaining why the Change of Control Board concept should also apply to major acquisitions made by acquiring corporations, the article then elaborates on the essential features of the concept. Finally, the article discusses how many of the principles could be implemented by the SEC through its rulemaking authority under the audit committee provisions of SOX.

SOX Doomsday Predictions in Hindsight: Evidence from Delistings

Once the enactment of the Sarbanes-Oxley Act of 2002 (SOX) became imminent, many companies protested that complying with SOX provisions was too onerous and costly and would result in many companies choosing to withdraw from public trading. We investigate whether these doomsday predictions were well-founded based on a review of SEC Form 15 requests to delist and related news releases during the period 2002 to 2004. Our findings suggest that there has not been a significant increase in the number of requests to delist since the enactment of SOX. Furthermore, we find that of companies that delist, relatively few (4.7 percent) attribute their delisting to SOX. Companies that did attribute their delisting to SOX were smaller and less likely to be audited by Big 4 auditors, characteristics that have been previously found to be associated with poorer financial reporting quality.

Accounting Students' Perceptions of the Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (SOX), which was created to enhance the integrity of financial reporting and protect financial statement users, affects many business professionals and especially accountants. The ultimate success of the SOX in achieving the goals set by lawmakers is not assured and ultimately will depend on the support from those affected by the Act. This study investigates accounting students' perceptions of (1) key provisions of the SOX, (2) the effect of the SOX's provisions on financial statement and audit quality, (3) their degree of knowledge of the provisions of the SOX, and (4) the degree and sufficiency of in-class coverage of those provisions. This study finds that the majority of the students participating in the study do not perceive that auditors should be prohibited from performing non-audit services for audit clients. However, the majority perceive that it is necessary for CEOs and CFOs to certify their financial statements and that this will improve financial statement quality. The majority also perceive that the Public Company Accounting Oversight Board audit firm registration requirement is appropriate and will improve audit quality. Only a small percentage of the students perceive that in-class coverage of the SOX is sufficient in accounting and non-accounting classes, although the percentage is higher for accounting classes. Surprisingly, accounting majors do not perceive that they are more knowledgeable than non-accounting majors. The findings from this study are important and provide information to accounting and business educators to guide them in enhancing and refocusing their in-class discussions of the SOX.

Trends and Determinants of Market Liquidity in the Pre- and Post-Sarbanes-Oxley Act Periods

Investors and market makers rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity and vibrancy to the capital markets. A rash of financial scandals during the turn of the 21st century eroded investor confidence in public financial information. In response, the Sarbanes-Oxley Act of 2002 (SOX) was enacted to reinforce accountability for public companies and rebuild investor confidence in public financial information. We investigate the trends and determinants of market liquidity in the pre-SOX period, particularly when the wave of financial scandals was reported, and in the post-SOX period when the Securities and Exchange Commission issued rules in implementing various provisions of SOX. We detect wider spreads, lower depths, and higher adverse selection component of spreads in the period surrounding the reported financial scandals, indicating that liquidity measures deteriorated as a result of those scandals. We find that liquidity measures improved following the passage of SOX. The observed improvement in market liquidity in the post-SOX period is positively associated with the quality of financial reports, several firm specific variables (e.g., size), market factors (e.g., price, volatility, volume), and microeconomic events (e.g., NYSE Open Book). The improvements in liquidity measures after the passage of SOX were more pronounced for companies that were closer to compliance than those that were far from compliance with their provisions prior to SOX.