Risk Management in the Post‐SOX Era
19 Pages Posted: 18 Feb 2012
Date Written: March 2012
Since the initial disclosure of accounting irregularities at Enron in late 2001, the landscape of audits for both domestic and foreign companies listed in the United States has undergone substantial change. These changes include the demise of Arthur Andersen and the enactment of the Sarbanes‐Oxley Act of 2002 (SOX). Together these changes have significantly increased the amount of work required to issue an audit report for US registrants and resulted in an unprecedented increase in the number of auditor resignations. I extend the audit literature by investigating how Big 4 audit firms make client continuance decisions in the post‐SOX era. My findings indicate that Big 4 audit firms have become more critical of the client continuance decision and this heightened concern and/or the additional audit requirements of SOX has resulted in the threshold for client continuance increasing post‐SOX. Interestingly, almost 70 percent of the Big 4 resignation clients move down in auditor class, and in the years immediately following the resignation, they continue to perform poorly.
Keywords: Client acceptance, client continuance, Sarbanes‐Oxley Act, risk management
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