Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?
Journal
Journal of Business Finance and Accounting
Journal Volume
39
Journal Issue
9-10
Pages
1240-1271
Date Issued
2012
Author(s)
Abstract
Abstract: 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.
SDGs
Type
journal article