The Effect of SOX on Small Auditor Exits and Audit Quality

Journal of Accounting and Economics, Vol. 52, pp. 21-40, 2011

Posted: 28 Aug 2011

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Date Written: August 26, 2011

Abstract

We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.

Keywords: Audit Quality, Sarbanes-Oxley Act, PCAOB, Audit Markets, Auditor Opinions

JEL Classification: M4

Suggested Citation

Lennox, Clive and DeFond, Mark, The Effect of SOX on Small Auditor Exits and Audit Quality (August 26, 2011). Journal of Accounting and Economics, Vol. 52, pp. 21-40, 2011. Available at SSRN: https://ssrn.com/abstract=1917856

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Mark DeFond

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

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