The effect of financial regulation on nonfinancial violations

DOI:	https://doi.org/10.2308/TAR-2023-0676
URL:	https://publications.aaahq.org/accounting-review/a...
Document Type:	Article
Year of publication:	2026
The title of a journal, publication series:	The Accounting Review
Volume:	101
Issue number:	1
Page range:	347-378
Place of publication:	Lakewood Ranch, FL
Publishing house:	American Accounting Association
ISSN:	1558-7967, 0001-4826
Publication language:	English
Institution:	Business School > ABWL u. Unternehmensrechnung (Bischof 2015-)
Subject:	330 Economics
Classification:	JEL: M40, M41,
Keywords (English):	corporate misconduct , SOX 404 , compliance , financial regulation
Abstract:	This paper examines the effect of financial regulation on nonfinancial violations. Using differences in compliance requirements with Sarbanes-Oxley Act of 2002 (SOX) Section 404, we find that adoption of Section 404 increased firms’ propensity for nonfinancial violations. This effect is stronger for firms with greater external scrutiny toward their financial reporting, greater challenges in monitoring their operations, and limited resources. These results, together with an examination of changes in audit fees, conference call transcripts, and 10-K disclosures, suggest that the effects primarily stem from a shift in attention and resources toward SOX 404. Further, the effects are concentrated in employee-related violations and persist for approximately two years. Overall, our results suggest that financial reporting regulation can result in unintended consequences harming stakeholders, such as employees.