Audit costs, material weaknesses under SOX Section 404

Purpose – Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002 required companies to report on the effectiveness of their internal controls over financial reporting. Auditors also must attest to, and report on, the assessment of the effectiveness of internal control over financial reporting made by the management of the company being audited. The purpose of this paper is to provide analyses of audit fee costs and material weaknesses reported for companies of different sizes after the effective date of Section 404 and suggest approaches to reduce SOX 404 compliance costs. Design/methodology/approach – Quantitative analysis and deductive reasoning are used to evaluate audit costs associated with Section 404. Findings – Audit fees have been increased substantially, particularly during the first year a company complied with Section 404, and have not been dropped substantially after the first year of compliance. Companies with sales of less than $1 billion reported significantly more material weaknesses than larger companies. Originality/value – This paper documents audit costs after the SOX Section 404 effective date, the typical types of material weaknesses reported, the proportion of companies of different sizes reporting material weaknesses, and describes approaches to reduce compliance costs.