Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms' internal control disclosures

We quantify measurable benefits and costs of exempting firms from auditor oversight of internal control effectiveness disclosures. We measure the benefit of exemption as an aggregate $388 million in audit fee savings from 2007-2014. The costs stem from internal control misreporting: an aggregate $719 million of lower operating performance due to non-remediation and a $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls. The audit fee savings benefit shareholders of all exempt firms, whereas the costs are borne by shareholders of only a fraction of exempt firms (the internal control misreporters).