Abstract
On April 27, 2020, the SEC’s expansion of the exemption to the internal controls over financial reporting (“ICFR”) audit required by Section 404(b) became effective. The SEC expanded the exemption to recognize that smaller entities have fewer resources, which makes it more burdensome to comply. The SOX framework of regulations for corporate governance was designed to work together, with the removal of one regulation potentially impacting the effectiveness of other regulations, such as audit committee oversight. Most of the research on SOX has been on larger entities subject to Section 404(b). This study explores whether the corporate governance framework for exempt entities may have different associations with financial reporting quality by examining the association between a financial expert and audit fees and restatements, as well as the association between audit committees with a financial expert with financial reporting expertise and restatements. The results indicate that a Financial Experts are not associated with audit fees or the occurrence of restatement, even if they are Financial Reporting Experts with a CPA or CA license. Indeed, in this sample entities with a Financial Reporting Expert on the board were more likely to have an occurrence of a restatement than other entities. The results indicate that an accountant’s professional judgment may be biased in the absence of regulatory enforcement or guidance in interpreting or applying transactions that could be deemed ambiguous and applied in a manner favorable to the entity. This study also indicates that entities with audit opinions containing critical audit matters (CAM) are less likely to have a restatement. Keywords: financial expert, 404(b), 404(c), ICFR audits, exemption, audit committee, oversight, corporate governance, smaller reporting companies, certified public accountants, critical audit matter