The impact of the Sarbanes–Oxley Act on the integrity of financial reporting: Was it meritorious?

Abstract

AbstractThis study investigates whether compliance with the Sarbanes–Oxley Act of 2002 (SOX) sections 302 (financial reporting) and 404 (internal controls) enhances both corporate governance and financial reporting integrity (FRI). It is focused on EU publicly traded companies that are cross‐listed in the US markets. Using a novel approach with respect to operationalization of the SOX, the empirical research integrated into this paper advances the understanding of financial reporting integrity for both practitioners and policymakers. The study argues that financial reporting integrity increased after SOX entered into force but, notably, we find that financial statement assertions improve with compliance with SOX302 but not with SOX404. Examination of the latter relationship at the subsection level also reveals that compliance with certain SOX requirements is not satisfactory.