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6. Conclusion
In this study, we have examined the effect of both SOX 404 and AS5 on ICFR-
disclosure errors. We have found that the enactment of SOX 404 has resulted in reduced
incidence of Type II errors, without the side effect of increasing Type I errors. We have
also documented that the more flexible and less prescriptive AS5 can enhance the
efficiency of ICFR audits by reducing Type I errors. However, because under AS5, audit
conclusions depend more on auditor judgments, auditors might misuse their professional
judgment and cut back on necessary testing procedures in the audits of internal controls,
which inadvertently, would result in lower public ICFR-disclosure quality measured as
increased Type II errors. Our results echo the concerns raised by investors and regulators
about AS5. A potential limitation of this study is sample size, which was restricted because
only large companies (i.e., accelerated filers) are subject to SOX 404(b). The Dodd-Frank
Wall Street Reform and Consumer Protection Act enacted in 2010 permanently exempts
non-accelerated filers from SOX auditor-attestation requirement. It is unclear whether our
evidence can be generalized to small companies.
Our work is among the pioneering studies to provide direct evidence of the relative
effects of SOX 404 and AS5 on ICFR-disclosure quality. Further, in Taiwan, the local
regulation on internal control reporting is quite similar to SOX 404 (a). Companies
conducting initial public issuance of its stock or public companies are required to conduct
and report annual management self-assessment of the design and operation effectiveness
of their internal control systems. Although mandatory ICFR audits are not required now,
our results, which demonstrate the benefits of ICFR audits and the effects of different
ICFR auditing standards, could provide insights for Taiwanese regulators and standard
setters to determine the feasibility of future ICFR-audit-related rulings.