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

40 Pages Posted: 6 Jun 2010  

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Veena L Brown

University of Wisconsin-Milwaukee; Florida Atlantic University

Joe Trainor

Florida Atlantic University

Date Written: May 25, 2010

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.

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

JEL Classification: M40

Suggested Citation

Kohlbeck, Mark J. and Brown, Veena L and Trainor, Joe, Did the SOX Ban on Non-Audit Services Go Far Enough or Too Far? Evidence from Investors’ Perception of Auditor Independence (May 25, 2010). Available at SSRN: https://ssrn.com/abstract=1620558 or http://dx.doi.org/10.2139/ssrn.1620558

Mark J. Kohlbeck (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Veena L Brown

University of Wisconsin-Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States
414-229-4471 (Phone)
414-229-5999 (Fax)

Florida Atlantic University ( email )

Boca Raton, FL 33431
United States

Joe Trainor

Florida Atlantic University ( email )

School of Accounting
Boca Raton, FL 33431
United States

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