Investors’ Perceptions of Auditors’ Economic Dependence on the Client – Post-SOX Evidence

35 Pages Posted: 2 Apr 2011

Date Written: February 8, 2011

Abstract

We revisit the client importance and auditor independence debate and investigate whether investors’ perceptions of the auditor’s economic dependence has changed since the passage of the Sarbanes-Oxley Act of 2002 (SOX). Client importance is measured as the proportion of client non-audit service fees, audit fees, or total fees to the total audit office revenue. Consistent with our hypothesis, we find a significant decrease in the association between both NAS and total fees and the cost of equity from the pre- to the post-SOX period, indicating that investors concerns over auditor independence have changed in the post-SOX period. Additionally, we find some evidence of a positive and significant association between both audit fees (2003) and total fees (2004) and cost of equity in the post-SOX period. Overall, these results indicate that the independence requirements in SOX and/or the heightened litigation environment post-SOX have, to some extent, mitigated but not completely eliminated investors’ concerns over the threat of economic fee dependence.

Keywords: Non-audit service fees, Total fees, Big 4 audits, Financial reporting credibility, SOX 404

Suggested Citation

Hollingsworth, Carl W. and Li, Chan, Investors’ Perceptions of Auditors’ Economic Dependence on the Client – Post-SOX Evidence (February 8, 2011). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1800765

Carl W. Hollingsworth (Contact Author)

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

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