Foreign Firms' Mandatory Reporting of Material Weaknesses in Internal Control

The enactment of the Sarbanes-Oxley Act (SOX) of 2002 established several reforms to improve corporate governance and financial reporting practices for companies listed in US capital markets. Given the important role played by foreign firms in US capital markets, the present article discusses the early effects of SOX's regulation on foreign firms. Country- and firm-level data provide a descriptive analysis of the characteristics and trends in material weakness in internal controls reporting for firms cross-listed on US exchanges. The discussion includes a description of the implementation timeline of Section 404 for foreign issuers and compares some of these characteristics to reports from US firms. Understanding the characteristics of cross-listed firms, as well as country-specific qualities, is important to auditors and managers as they strive to maintain audit quality and improve internal control practices and corporate governance. This information is beneficial to regulators as these characteristics could have implications in the evaluation of foreign firms' compliance with Section 404 requirements