Audit Fees and Auditor Dismissals in the Sarbanes-Oxley Era

22 Pages Posted: 12 Sep 2006 Last revised: 17 Sep 2009

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Chan Li

University of Kansas

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Abstract

The accounting scandals and Sarbanes-Oxley Act (SOX) of 2002 resulted in large increases in required audit work, and corresponding increases in audit fees for public companies. This study provides early evidence regarding the relationship between higher audit fees, both levels and changes, and auditor dismissals in the period immediately subsequent to the passage of SOX. We find that clients paying higher fees are more likely to dismiss their auditors. We also find that dismissals are associated with smaller companies, companies with going concern reports and companies that later reported material weaknesses in their internal controls. Among dismissing clients, smaller Big 4 clients, paying higher fees, tend to hire non-Big 4 successor auditors. This result holds when auditors are divided into Big 4, national and local tiers. We also find evidence that dismissing clients, in particular clients hiring new non-Big 4 auditors, experience smaller fee increases than non-switching clients in the following year. These results are consistent with the notion that in the immediate post-SOX period, some companies dismissed their auditors in expectation of lower fees from the succeeding auditor.

Keywords: auditor dismissal, audit fees, SOX 404

JEL Classification: M49, G34, G38, G33, M41

Suggested Citation

Ettredge, Michael L. and Li, Chan and Scholz, Susan, Audit Fees and Auditor Dismissals in the Sarbanes-Oxley Era. Accounting Horizons, Vol. 21, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=929486

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Chan Li

University of Kansas ( email )

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

Susan Scholz (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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