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

35 Pages Posted: 2 Apr 2011

Date Written: February 8, 2011


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:

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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