Companies that disclose control problems ahead of restatements get no pat on the back or other indicators of gratitude from investors. On the contrary, they are more likely to face harsher consequences for their transparency than companies that provide no advance warning.
That’s the conclusion of a recent academic study, “Does SOX Have Teeth?,” published in The Accounting Review. The paper explores the consequences of the failure to report existing internal control weaknesses. It says companies are more likely to face penalties if they foretell weakness in controls than companies that restate with no prior warning of control weakness. “Companies which evidently take SOX 404 to heart are penalized,” said co-author David Weber of the University of Connecticut in a statement.
