Is SOX 404(a) Management Internal Control Reporting an Effective Alternative to SOX 404(b) Internal Control Audits?

Section 404 of the Sarbanes-Oxley Act (SOX 2002) continues to be controversial. Using samples of SEC registrants with market capitalizations less than $150 million we find that, non-accelerated filers have significantly larger reduction in the likelihood of material misstatements, discretionary revenues and discretionary accruals compared to smaller accelerated filers after non-accelerated filers became subject to the requirements of Section 404(a). Our findings are consistent with the argument that management reporting on internal controls (Section 404 (a)) may be a cost effective alternative to internal control audits (Section 404(b)) for smaller U.S. public companies