Benjamin Patrick Foster, Robert P. Garrett, Jr and Trimbak Shastri
This paper aims to examine whether the ability of early-stage ventures to obtain external funding and the amount of additional information provided to potential investors are…
Abstract
Purpose
This paper aims to examine whether the ability of early-stage ventures to obtain external funding and the amount of additional information provided to potential investors are affected by the level of assurance (audit, review or compilation) received from independent accountants on the ventures’ historical financial statements. The assurance level provided should differently impact potential investors’ willingness to invest in a new venture and need for additional information during due diligence evaluation of the organization and entrepreneur.
Design/methodology/approach
To examine the relative effects of the signal provided by these levels of assurance on investment decisions, a survey is administered to collect data regarding an investment-related decision scenario. The three levels of assurance in independent accountant’s reports (audit, review or compilation) is manipulated when eliciting participants’ responses.
Findings
Results indicate that respondents perceive the signal provided by compilation reports, review reports and audit reports as increasing in reliability and are more likely to invest in a venture providing reports with that increasing reliability. Audited financial statements are viewed as the most reliable and provide a positive signal to potential investors and lenders. Consequently, potential investors may require less additional information from entrepreneurs with audited financial statements when conducting due diligence investigations.
Research limitations/implications
Subjects used (Master of Business Administration students, with an average work experience of over six years, including some with investing experience) may not be the best proxies for early-stage investors.
Originality/value
This is the first study to examine the relative effectiveness of signals provided by the independent accountant’s audit, review and compilation reports in assisting early-stage business ventures and entrepreneurs raising funds, and dealing with due diligence requests for additional information. Results indicate that engaging an auditor for independent assurance on financial statements can benefit entrepreneurs by increasing the likelihood of obtaining necessary funds and decreasing the amount of additional information needed by potential investors.
Details
Keywords
Benjamin P. Foster, William Ornstein and Trimbak Shastri
Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002 required companies to report on the effectiveness of their internal controls over financial reporting. Auditors also must…
Abstract
Purpose
Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002 required companies to report on the effectiveness of their internal controls over financial reporting. Auditors also must attest to, and report on, the assessment of the effectiveness of internal control over financial reporting made by the management of the company being audited. The purpose of this paper is to provide analyses of audit fee costs and material weaknesses reported for companies of different sizes after the effective date of Section 404 and suggest approaches to reduce SOX 404 compliance costs.
Design/methodology/approach
Quantitative analysis and deductive reasoning are used to evaluate audit costs associated with Section 404.
Findings
Audit fees have been increased substantially, particularly during the first year a company complied with Section 404, and have not been dropped substantially after the first year of compliance. Companies with sales of less than $1 billion reported significantly more material weaknesses than larger companies.
Originality/value
This paper documents audit costs after the SOX Section 404 effective date, the typical types of material weaknesses reported, the proportion of companies of different sizes reporting material weaknesses, and describes approaches to reduce compliance costs.