How Informative are SOX 404 Reports?

This study experimentally examines a random sample of 50 SOX 404 reports issued between 2004 and 2009 to determine their informativeness, as represented by their readability measured by the Fog index and understandability measured by coding errors. We hypothesize that there has been no change in informativeness over time, more experienced auditors will better comprehend SOX 404 reports, and that significant readers' expertise is required to overcome lack of clarity in SOX 404 reports. The results indicate that the informativeness of longer reports decreased over time, which was mitigated by a decreased in their frequency. Interestingly, shorter reports are found to be more informative. Further, auditors' understanding is affected by SOX 404 reports' lack of readability and novices' understanding is affected more than experts' understanding. This finding implies that the investing public would be even more adversely affected, although we do not test this conjecture directly