Sarbanes-Oxley Section Effect on Audit Fees
Isolating Sarbanes-Oxley Section 404(b) effect on audit fees and market liquidity: a natural experiment.
Premalata Sundaram* PDBP 2010 University of Florida
August 23, 2010
Abstract
Since the passage of the Sarbanes-Oxley Act (SOX) of 2002, a large body of evidence has accumulated on the costs this legislation has imposed on public companies in the United States. Estimates of the direct costs of the law have been fairly straightforward to measure, but the indirect costs of the legislation like incremental audit and non-audit fees, additional audit effort and additional internal control audit expenses like payroll and technology are harder to estimate due to lack of detailed data on these expenses. Since audit fees had been rising prior to 2002 due to a riskier auditing climate and due to the demise of Arthur Anderson in the Enron debacle, it is difficult to isolate the effect of SOX on audit fees in the U.S. Some studies have looked at the effect of SOX on audit fees and have documented an increase in the same, including a Big 4 premium. However, the portion of the increase attributable specifically to the 404(b) auditor attestation requirement is unobservable (Coates 2007) . This study aims to fill this critical gap in the literature by estimating the portion of the incremental audit fees that is the result of the auditor attestation requirement of Section 404 by using a unique dataset of Indian companies. Clause 49 of the exchange listing requirements for companies in India required CEO/CFO certifications on internal controls and financial statements since 2003. Some of these companies are also cross-listed on US exchanges and have to comply with Section 404 from fiscal year-end Dec 2009. This provides a natural experiment to isolate the incremental compliance costs due to Section 404 for the cross-listed firms. The results of this study have important implications for policy makers and regulators in the U.S. who are concerned about the
Premalata Sundaram* PDBP 2010 University of Florida
August 23, 2010
Abstract
Since the passage of the Sarbanes-Oxley Act (SOX) of 2002, a large body of evidence has accumulated on the costs this legislation has imposed on public companies in the United States. Estimates of the direct costs of the law have been fairly straightforward to measure, but the indirect costs of the legislation like incremental audit and non-audit fees, additional audit effort and additional internal control audit expenses like payroll and technology are harder to estimate due to lack of detailed data on these expenses. Since audit fees had been rising prior to 2002 due to a riskier auditing climate and due to the demise of Arthur Anderson in the Enron debacle, it is difficult to isolate the effect of SOX on audit fees in the U.S. Some studies have looked at the effect of SOX on audit fees and have documented an increase in the same, including a Big 4 premium. However, the portion of the increase attributable specifically to the 404(b) auditor attestation requirement is unobservable (Coates 2007) . This study aims to fill this critical gap in the literature by estimating the portion of the incremental audit fees that is the result of the auditor attestation requirement of Section 404 by using a unique dataset of Indian companies. Clause 49 of the exchange listing requirements for companies in India required CEO/CFO certifications on internal controls and financial statements since 2003. Some of these companies are also cross-listed on US exchanges and have to comply with Section 404 from fiscal year-end Dec 2009. This provides a natural experiment to isolate the incremental compliance costs due to Section 404 for the cross-listed firms. The results of this study have important implications for policy makers and regulators in the U.S. who are concerned about the
Bibliography: Laval, 2009. 5 (2009): (2007): 91-‐116.