The Sarbanes Oxley Act, Auditor Independence and Accounting Accruals: An Empirical Analysis

Abstract

We provide evidence on the relation between office-level client importance and abnormal accruals in a pre-SOX period and a post-SOX period. We find that in the pre-SOX period the relation is not significant for the overall sample. However, it is significantly positive for the sub-sample of firms with relatively weak governance mechanisms. More importantly, we find that for this sub-sample the positive relation between client importance and abnormal accruals remains statistically significant even in the post SOX period. Our results suggest that (i) auditor independence was not widely compromised in pre-SOX periods as presumed by the proponents of SOX, (ii) strong governance mechanisms mitigate the potentially adverse effects of client importance on auditor independence, and (iii) SOX has not been successful in mitigating the adverse effects of client importance on auditor independence for firms with weak governance.

Keywords: Sarbanes-Oxley, Auditor Independence, Corporate Governance, Accounting Accruals

JEL Classification: G3, M41, N22