Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?

:  This study examines whether compensation committees adjust CEO/CFO compensation using the auditor opinions on internal control effectiveness (SOX 404 opinions), and whether the emphasis on internal controls depends on the level of compensation committees’ financial expertise. Following SOX 404, a...

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Bibliographic Details
Published inJournal of business finance & accounting Vol. 39; no. 9-10; pp. 1240 - 1271
Main Authors Hsu, Audrey Wen-Hsin, Liao, Chih-Hsien
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing Ltd 01.11.2012
Subjects
Auditing
Auditors
Business accounting
Chief executive officers
Committees
Compensation
compensation committee
Executive compensation
Experts
financial expertise
Financial management
Financial reporting
Fraud
internal control
Internal controls
pay-performance sensitivity
Public Company Accounting Reform & Investor Protection Act 2002-US
SOX 404
Studies
United States > US
Online AccessGet full text
ISSN0306-686X
1468-5957
DOI10.1111/j.1468-5957.2012.02302.x

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Summary::  This study examines whether compensation committees adjust CEO/CFO compensation using the auditor opinions on internal control effectiveness (SOX 404 opinions), and whether the emphasis on internal controls depends on the level of compensation committees’ financial expertise. Following SOX 404, a firm's CEO and CFO are required to evaluate the effectiveness of internal controls over financial reporting, subject to the auditor's attestation. In light of recent accounting fraud, we expect and find that compensation committees adjust CEO/CFO compensation by reference to the SOX 404 opinions. Using different measures of financial expertise, we also find that the relationship is more pronounced in firms with higher levels of financial expertise. Our results suggest the importance of including directors with financial expertise on compensation committees.
Bibliography:ark:/67375/WNG-W863JRR6-2
ArticleID:JBFA2302
istex:D17EDF5C7BDD63A39570107BD1EFC721B29A7445
The authors are both from the Department of Accounting, College of Management, National Taiwan University. They appreciate the constructive comments of Steven Young (associate editor), an anonymous referee, and workshop participants at Kyoto University, National Chengchi University, and the 2011 American Accounting Association Annual Meeting. Financial support from the National Science Council in Taiwan is gratefully acknowledged.
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ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.2012.02302.x