Date of Completion
David P. Weber
I examine whether firms with the ability to manipulate earnings per share (EPS) rounding and the incentive to defer the Sarbanes-Oxley Act of 2002 Section 404(b) (SOX 404(b)) compliance round down EPS to understate earnings before a public float evaluation in the second fiscal quarter. I build on existing literature that acknowledges some firms may manipulate the post-decimal (thousandths) digit of EPS and that firms near the SOX 404(b) public float compliance threshold may initiate avoidance techniques to defer the marginal cost of an Internal Controls over Financial Reporting (ICFR) external audit. By comparing the rounding behavior of accelerated filers and non-accelerated filers with public floats between ±20% of $75 million, I provide evidence that profitable non-accelerated filers faced with the marginal SOX 404(b) compliance costs have a higher likelihood of rounding down their diluted EPS to the nearest cent in the first fiscal quarter compared to accelerated filers in the same quarter. These results are consistent with non-accelerated filers managing reported EPS to avoid costly compliance with SOX 404(b).
Bigos, David, "The Effect of SOX 404(b) on Large Non-Accelerated Filers’ Earnings Per Share Rounding Behavior" (2019). Honors Scholar Theses. 645.