A new academic study claims to have arrived at a numeric computation of the cost and benefit of exempting smaller companies from Sarbanes-Oxley internal control auditing — and it suggests investors are not necessarily better off for the exemption.

Academics at the University of Washington and Georgetown University say smaller companies that are exempt from Section 404(b) of Sarbanes-Oxley, which requires companies to have their Section 404(a) internal control reports audited, are saving plenty in audit fees, but losing even more in terms of lower operating performance and market values.

The study is based on a sample of more than 5,300 exempt firm-year observations from 2007 to 2014. It finds for those companies in those years, companies saved $388 million in audit costs by not having to get an audit of their reports on their internal control over financial reporting.

The study also finds that those same companies in those same years left $856 million on the table in terms of future earnings they might have recorded had they better remediated internal controls, along with an additional $935 million in delayed aggregate market value attributable to untimely internal control disclosure.

The authors also developed a model of internal control effectiveness based on the filings of the smallest companies that are subject to the 404(b) audit requirement, and they apply that model to companies that are exempt. In so doing, the authors calculated that 20 percent of companies that are exempt should be disclosing ineffective internal controls, but only 11 percent actually do so. That suggests roughly half of companies who are exempt from the audit requirement and have control problems are not properly reporting them, the study says.

Comparing small companies that report internal control deficiencies with those that are exempt from the audit, the authors also developed some markers to identify exempt companies that may be failing to report control problems. Those markers look at things like disclosures of accounting personnel issues, disclosures of weaknesses related to segregation of duties, year-end audit adjustments, disclosures of information identifying underlying causes of control problems, and disclosures of material weaknesses related to revenue recognition and cost of sales.

The Sarbanes-Oxley reporting requirements took effect in 2004 but certain aspects were delayed for companies with market capitalizations below $75 million. Those smallest public companies won the exemption from Sarbanes-Oxley Section 404(b) audits under the Dodd-Frank Act, which Congress is now attempting to dismantle. Various measures also have sought to expand the exemption in recent years.