Roy Schmardebeck, assistant professor of accounting and information management in the Haslam College of Business at the University of Tennessee, Knoxville, and research fellow for the Neel Corporate Governance Center, was recently invited to the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., to present his research. Schmardebeck and his co-authors examined the compliance costs associated with financial reporting within publicly traded companies, a rule the SEC is currently examining for its costs to smaller firms and filers. 

“Have the Costs and Benefits of SOX Section 404(b) Compliance Changed Over Time?” is coauthored with Jenny McCallen (University of Georgia), Jonathan Shipman (University of Arkansas) and Rob Whited (North Carolina State University). Shipman and Whited each graduated from Haslam with a Ph.D. in accounting in 2014. 

Often argued as one of the costliest components of the Sarbanes-Oxley Act of 2002 (SOX), Section 404(b) requires publicly traded companies to obtain an audit opinion on the effectiveness of their internal controls over financial reporting. The provision was originally mandated for large accelerated filers and accelerated filers, but after concerns about undue burdens on smaller filers, non-accelerated filers (less than $75 million in public float) were exempted from the auditor requirement. Currently, the SEC is soliciting comments on whether it should change the exemption requirements so that more companies are exempted.

Schmardebeck and his coauthors find that 404(b) compliance costs have not materially and sustainably declined since the inception of SOX. The research also suggests that compliance costs do not appear to be supported by reporting benefits through more informative internal control reports or more reliable financial statements, a finding that may aid regulators as they consider proposed amendments to exempt more small companies from 404(b). 

“The SEC’s current interest in Section 404(b) is unsurprising given the importance of internal controls to accurate and complete financial disclosures,” says Joan Heminway, Neel Center fellow and UT College of Law faculty member. “The work Roy and his coauthors are doing sheds light on the extent to which current efforts at deregulation should result in a recalibration of existing compliance requirements relating to internal controls.”

The researchers met with SEC Commissioner Robert J. Jackson, Jr. and three members of Jackson’s staff on October 9 to discuss their paper’s implications for the current regulatory regime and what type of data would be needed to test empirically where 404(b) compliance thresholds should be. Jackson had noticed the paper in the Columbia Law School’s Blog on Corporations and the Capital Markets (the “Blue Sky Blog”). 

“He invited us for a visit because he thought that it was important for the current debate about the compliance threshold for SOX 404(b),” Schmardebeck says. “It was clear that he had read our paper because he had specific questions about our research question and methodology. He gave us helpful feedback and proposed additional tests that could expand our contribution.”  

“This is an extraordinary opportunity to receive feedback from the SEC on an ongoing research project,” says Lauren Cunningham, director of research for the Neel Center, “especially because Jackson reached out to the coauthors directly and spent nearly two hours with them. Normally, when we present research papers, we’re in a larger group setting and may only have one hour to get feedback.” 

“All of us at the Haslam College of Business are extremely proud of Roy’s contributions to the accounting profession,” Terry Neal, director of the Neel Center, says. “This invitation to meet with a commissioner of the SEC attests to the impact and significance of Roy’s research.”