Post-Sox Downward Auditor Switches and Their Impacts on the Nonprofit Audit Market

Posted: 14 Oct 2017

Date Written: June 10, 2017


This study examines the extent of downward auditor switches from Big 4 audit firms by nonprofit organizations (NPOs) after enactment of the Sarbanes-Oxley Act (SOX). Although SOX provisions do not directly apply to nonprofit organizations, capacity constraints and client realignments due to SOX may have reduced the Big 4 presence in the nonprofit audit market. We find that downward switches from a Big 4 firm increased in the post-SOX period. Universities and colleges are more likely than other NPOs to have downward switches from a Big 4 audit firm in the post-SOX period compared to the pre-SOX period. These results suggest that SOX had differential impacts on NPOs depending on the nature of the organization. Risky NPOs, as indicated by the existence of internal control deficiencies, were more likely to have downward auditor switches. NPOs are more likely to choose a non-Big 4 specialist following a downward switch compared to other NPOs with non-Big 4 auditors, consistent with higher demand for audit quality by these organizations. We do not find significant evidence that downward switches for these organizations are associated with decreases in subsequent donations. However, we find that downward switchers are associated with increases in material weaknesses in internal control.

Keywords: auditor switch, nonprofit audit market, Sarbanes-Oxley Act, auditor specialization, material weaknesses

JEL Classification: M41, M42, M48, L31

Suggested Citation

Feng, Nancy Chun and Elder, Randy, Post-Sox Downward Auditor Switches and Their Impacts on the Nonprofit Audit Market (June 10, 2017). Journal of Accounting and Public Policy, Vol. 36, No. 5, 2017, Available at SSRN:

Nancy Chun Feng (Contact Author)

Suffolk University ( email )

120 Tremont St
Boston, MA 02108
United States
617-573-8719 (Phone)

Randy Elder

Syracuse University ( email )

900 S. Crouse Avenue
School of Management Department of Accounting
Syracuse, NY 13244
United States
315-443-3359 (Phone)
315-443-5457 (Fax)

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