Does the 2013 COSO internal control framework improve the information environment in the U.S. capital markets?

What is it about?

SOX Section 404 requires public companies to assess and their external auditors to attest to the effectiveness of internal controls over financial reporting (ICFR). These companies assess their ICFR against the Internal Control Framework issued by COSO in 2013. This paper examines whether the implementation of the 2013 Control Framework positively impacts the information environment of U.S. public companies. While considerable research has explored the effects of ICFR disclosures, few studies have examined how the underlying internal control benchmark influences the quality and reliability of ICFR assessments and related disclosures. Using a sample of the S&P 1500 index and the Russell 2000 index firms, we find a significant reduction in bid-ask spreads following the adoption of the 2013 Control Framework. These findings support the conclusion that the 2013 Control Framework is indeed “much improved.”

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