Did the SOX Ban on Non-Audit Services Go Far Enough or Too Far? Evidence from Investors’ Perception of Auditor Independence

Abstract:     
We investigate changes in the level of non-audit services (NAS) provided by incumbent auditors following strengthened auditor independence rules required by the Sarbanes-Oxley Act of 2002 (SOX). On the one hand, the provision of NAS may impair auditor independence. Alternatively, benefits from knowledge spillover effects may result. We first examine characteristics of companies that reduce NAS subsequent to SOX. We find that the reduction in NAS is greater as agency costs increase and corporate governance strengthens. We then investigate whether investor perception of independence is affected and provide evidence of decreasing ERCs and increasing bid-ask spreads associated with the reduction in NAS post-SOX where there were no differences pre-SOX. These latter results are consistent with investor concerns about the loss of knowledge spillover effects and not auditor independence. We therefore provide evidence of negative effects from the ban on NAS.

Number of Pages in PDF File: 40

Keywords: Non-Audit Services, Auditor Independence, Knowledge Spillover, SOX

JEL Classification: M40

working papers series