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The Impact of Regulation on Auditor Fees: Evidence from the Sarbanes-Oxley Act

45 Pages Posted: 27 Nov 2007 Last revised: 17 Mar 2015

Al (Aloke) Ghosh

City University of New York (CUNY) - Baruch College

Robert J. Pawlewicz

George Mason University

Date Written: February 1, 2008

Abstract

We examine changes in fees paid to auditors around the Sarbanes-Oxley Act (SOX, 2002). Audit fees are expected to increase after SOX due to both increased audit effort and potentially increased auditors' legal liability. Our results indicate an economically large increase in audit fees following the enactment of SOX. Controlling for size of the auditor, auditor's opinion, and client characteristics, we find that audit fee levels went up approximately 74 percent in the post-SOX period. In contrast, non-audit fees declined significantly over the same period. Total fees went up during this period because the increase in audit fees offset the decline in non-audit fees. Our conclusions remain unchanged when we use audit fee change regressions. Additionally, we find that the Big 4 audit firms increased audit fees by 42 percent more than their smaller counterparts. Further, we find that while small and large audit firms discount fees on initial engagements to attract new clients for the pre-SOX period, only small audit firms continue of offer fee discounts for the post-SOX years. Our results remain robust even after a battery of sensitivity analyses.

Keywords: Audit Fees, Non-audit Fees, The Sarbanes-Oxley Act, Fee Discounting, Low-balling

JEL Classification: L84, M41, M49, G38

Suggested Citation

Ghosh, Al (Aloke) and Pawlewicz, Robert J., The Impact of Regulation on Auditor Fees: Evidence from the Sarbanes-Oxley Act (February 1, 2008). Auditing: A Journal of Practice & Theory, Vol. 28, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=1032642 or http://dx.doi.org/10.2139/ssrn.1032642

Al (Aloke) Ghosh (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way
P.O. Box B12-225
New York, NY 10010
United States
646-312-3184 (Phone)
646-312-3161 (Fax)

Robert J. Pawlewicz

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

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