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How understandable are SOX 404 auditors reports?

Author

Listed:
  • Efrim Boritz, J.
  • Hayes, Louise
  • Timoshenko, Lev M.

Abstract

This study experimentally examines potential non-professional investors’ understanding of a random sample of SOX 404 reports containing both IT weaknesses (ITWs) and non-IT weaknesses (non-ITWs) as reflected in their internal control weakness (ICW) severity ratings and their accuracy in identifying the reported ICWs. We find that the number of perceived non-ITWs and report length are positively associated with potential investors’ ICW severity ratings and that failing to perceive non-ITWs reduces potential investors’ ratings of weakness severity. However, the number of perceived ITWs is not associated with potential non-professional investors’ ratings of the overall severity of ICWs. Potential investors’ errors in identifying both non-ITWs and ITWs are associated with the number of non-ITWs and ITWs reported. Also, errors are positively associated with lower readability of SOX 404 reports. We identify specific types of ITWs and non-ITWs that contribute the most to the total number of errors made by non-professional investors in perceiving ICWs.

Suggested Citation

  • Efrim Boritz, J. & Hayes, Louise & Timoshenko, Lev M., 2020. "How understandable are SOX 404 auditors reports?," International Journal of Accounting Information Systems, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:ijoais:v:39:y:2020:i:c:s1467089520300543
    DOI: 10.1016/j.accinf.2020.100486
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    References listed on IDEAS

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    Cited by:

    1. Li, Wanyun, 2022. "Disclosure of internal control material weaknesses and optimism in analyst earnings forecasts," International Journal of Accounting Information Systems, Elsevier, vol. 44(C).

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    More about this item

    Keywords

    SOX 404 reports; Readability; Understandability; Internal control weaknesses;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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