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This paper was published as a Faculty Working Paper (no. 211) for the Lubin School of Business, Center for Applied Research, August 2003.

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Article

Abstract

The Sarbanes-Oxley Act of 2002 mandates senior management to certify under oath that information contained in SEC filings is accurate and complete, and attest to the effectiveness of the internal control system. This study examines the factors that influenced senior management to voluntarily issue a statement of responsibilities in annual reports for a five-year period prior to this legislation. Exploring these factors sheds light on three major issues: (1) identifying the environment under which the new legislation would better achieve its objectives; (2) probing into the concerns of firms that must comply with the new legislation; and (3) highlighting implications for the external auditor in planning the audit and assessing audit risk. We hypothesize that confidence in internal control and monitoring mechanisms at larger firms, corporate profitability, business risk and volatility, ownership structure, leverage, and governance monitoring are critical factors in management's decision to report on its responsibilities in financial statements.

The results reveal that senior management at larger firms were more likely to voluntarily disclose its responsibilities, ostensibly to maintain credibility with third parties and mitigate sensitivity to political costs. Moreover, management presiding over more-profitable firms were forthcoming with such disclosures, demonstrating a desire to signal its successful stewardship and organizational success. Lastly, senior management of firms in more volatile or uncertain environments displayed an aversion to risk that negatively influenced its disclosure decision. Monitoring by institutional owners, audit committees, and independent auditors displayed little influence on management's disclosure decision.

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