Discretionary Accrual Changes Following the Sarbanes-Oxley Act
57 Pages Posted: 12 Sep 2007 Last revised: 16 Feb 2020
Date Written: February 1, 2007
Abstract
We examine changes in discretionary accruals following the Sarbanes-Oxley Act (SOX). SOX imposes considerably greater potential penalties on CEO/CFOs who engage in financial wrongdoing; therefore, risk averse managers are likely to report lower earnings by reducing discretionary accruals following SOX. Our results indicate that (1) Canadian firms subject to SOX report lower discretionary accruals in the post-SOX period; (2) there is no regulatory spillover effect of SOX on Canadian firms not under the jurisdiction of SOX; (3) the impact of SOX on firms' conservative reporting through discretionary accruals in the post-SOX period is not homogeneous; it is more pronounced for firms that were aggressive in the pre-SOX period.
Keywords: Sarbanes-Oxley Act, discretionary accruals, regulatory spillover
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