Work

The Effect of Financial Regulation on Nonfinancial Violations

Year: 2025

Type: article

Abstract: ABSTRACT This paper examines the effect of financial regulation on nonfinancial violations. Using differences in compliance requirements with Sarbanes-Oxley Act of 2002 (SOX) Section 404, we find that adoption of Section 404 increased firms’ propensity for nonfinancial violations. This effect is stronger for firms with greater external scrutiny toward their financial reporting, greater challenges in monitoring their operations, and limited resources. These results, together with an examination of changes in audit fees, conference call transcripts, and 10-K disclosures, suggest that the effects primarily stem from a shift in attention and resources toward SOX 404. Further, the effects are concentrated in employee-related violations and persist for approximately two years. Overall, our results suggest that financial reporting regulation can result in unintended consequences harming stakeholders, such as employees. JEL Classifications: M40; M41.

Source: The Accounting Review

DOI: 10.2308/tar-2023-0676

Authors: Vincent Giese, Jonas Heese

Institutions: University of Mannheim, Paderborn University, Harvard University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: bronze

Funder: Universität Mannheim