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.
Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?
Version of Record online: 5 SEP 2012
© 2012 Blackwell Publishing Ltd
Journal of Business Finance & Accounting
Volume 39, Issue 9-10, pages 1240–1271, November/December 2012
How to Cite
Hsu, A. W.-H. and Liao, C.-H. (2012), Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?. Journal of Business Finance & Accounting, 39: 1240–1271. doi: 10.1111/j.1468-5957.2012.02302.x
- Issue online: 11 JAN 2013
- Version of Record online: 5 SEP 2012
- (Paper received March 2011, revised version accepted May 2012)
- compensation committee;
- executive compensation;
- financial expertise;
- internal control;
- pay-performance sensitivity;
- SOX 404
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.