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Assessment of the Sarbanes-Oxley Act on the Firm Using a Difference-in-Difference Estimator

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Executive Summary

The Sarbanes-Oxley Act (SOX) of 2002 which is also known as the Public Company Accounting Reform and Investor Protection Act promulgates the importance of effective internal control systems after a series of accounting scandals in the early 2000's in which firms misreported their earnings. The main objective for the implementation of SOX is to improve the quality and transparency of financial reports and provide investors more confidence in these financial reports by focusing more on internal controls of financial reporting by firms. More importantly, Sections 302 and 404 of this Act require publically traded companies to certify the effectiveness of their internal controls and assessment by its management that the internal controls implemented are adequate.

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