With Securities and Exchange Commission chairman Christopher Cox last month announcing a one-year delay in imposing Sarbanes-Oxley Section 404 requirements for small public companies - something that would buy the SEC time to finish a study into compliance costs (as if nobody already knows) - it's worth looking at the broader impact of Section 404.

There is really no point looking at whether Section 404's benefits outweigh its costs or vice versa because that's been done to death. An interesting question here is what impact it's had on financial reporting.

Some interesting insights from McGill University's Zvi Singer and Barclay's Global Investors Haifeng You in their paper The Effect of Section 404 of the Sarbanes-Oxley Act on Financial Reporting .

With a final sample size of more than 5000 unique firms, the researchers found that the quality of financial reporting improved in such areas as discretionary accruals and the power of earnings to predict future cash flows.

But the more interesting finding was that companies that are not yet subject to Section 404 also improved. This raises an obvious question. Was the improvement in non-complying companies being driven by forces that had nothing to do with Section 404 and if so, was the improvement in financial reporting for complying companies the result of something that had nothing to do with Section 404? Or is it a case that the effect of accounting rules and regulations goes beyond simple instructions?

The researchers say that Section 404 seems to have had a broader than expected impact. Put simply, they argue it might well the case that non-complying firms are trying to tell the market something, that their reporting quality is still right up there with the best, even if they don't have to comply with Sarbanes-Oxley. "It is possible that Section 404 has served to set the tone or for creating higher reporting norms that affects all firms,'' the researchers say. "It is possible that the improvement is due to actions taken by non-complying firms in anticipation of the eventual implementation. or that some non-complying firms improve the reporting practices to signal their quality through costly actions of reviving their internal controls".