Chiu, H. L., and Ling-Tai Lynette Chou 2018. Do Both SOX 404 and AS5 Reduce ICFR-Disclosure Errors?. NTU Management Review, 28 (1): 255-286. https://doi.org/10.6226/NTUMR.201804_28(1).0007
Hsien-Lian Chiu, Assistant Professor, Department of Accounting and Information Technology, National Chung Cheng University
Ling-Tai Lynette Chou, Professor, Department of Accounting, National Chengchi University
Abstract
The purpose of this study is to examine the effect of both SOX 404 and AS5 on ICFRdisclosure errors. We follow the rationale and method developed by Knechel and Vanstraelen (2007) and regard restatement companies (nonrestatement companies) as those with weak (effective) internal controls and greater (lower) likelihood to receive adverse ICFR opinions. We presume that deterioration in ICFR-disclosure quality is shown by an increase in the likelihood of Type II errors (a restatement company fails to conclude that its internal control system is ineffective for the restated period) or an increase in the likelihood of Type I errors (a nonrestatement company concludes that its internal control system is ineffective for the nonrestatement period). Our evidence indicates that the enactment of SOX 404 reduces the Type II errors of ICFR disclosures, without the side effect of increasing Type I errors. In addition, we find that even though the more flexible and less prescriptive AS5 can enhance the efficiency of ICFR audits by reducing Type I errors, it inadvertently lowers public ICFR disclosure quality, measured as increased Type II errors.
Keywords
SOX 404AS5ICFR-disclosure errorsquality of internal control disclosureinternal control audit