This paper documents that management still have significant influence over auditor selection in the post-SOX Act period. The quality of audit committee seems not to reduce management influence in auditor selection. The findings call into question the effectiveness of Section 301 of SOX Act that requires the audit committee be directly responsible for choosing auditors. The study also shows the assumption that hiring auditors affiliated with the management would harm auditor independence is unwarranted. The findings of this paper are primarily informative to the standard setters and regulators.
Dhaliwal, D. S., P. T. Lamoreaux, C. S. Lennox, and L. M. Mauler. 2015. Management influence on auditor selection and subsequent impairments of auditor independence during the post‐SOX period. Contemporary Accounting Research 32 (2): 575–607.
Given that auditor concentration is an important topic that has seen relatively little empirical research, this study contributes to the literature by providing more complete evidence on the relation between auditor concentration and audit quality. Concentration reduced the opportunity for Big 4 clients to switch auditors particularly given the new auditor independence requirements following the 2002 Sarbanes-Oxley Act. Reduced choice is seen as increasing auditor entrenchment and complacency, and potentially contributing to a more lenient and less skeptical audit for clients.
Boone, J. P., I. K. Khurana, and K.K. Raman. 2012. Audit Market Concentration and Auditor Tolerance for Earnings Management* Audit Market Concentration and Auditor Tolerance for Earnings Management. Contemporary Accounting Research 29 (4): 1171-1203.
While there are ex ante societal benefits to SOX-type reforms, in terms of reduced fraud, better financial reporting, and the resulting reduction of negative externalities, the regulator must consider the total societal costs of SOX-type reforms, including real costs to society resulting from smaller private firms opting to be acquired rather than going public. The authors leave a consideration of the costs and benefits of SOX-type regulations up to the global regulatory community, with the hope that the stylized facts presented in this study inform the ongoing debate about the socially optimal level of mandatory investment in internal and external monitoring.
Bova, F., M. Minutti-Meza, G. Richardson, and D. Vyas. 2014. The Sarbanes-Oxley Act and Exit Strategies of Private Firms. Contemporary Accounting Research 31 (3): 818-850.
The results of this study indicate that banning the provision of both non-audit and audit services by a single firm likely increased perceptions of auditor independence, but did not significantly effect overall judgments of reliability or the extent to which financial statement users incorporate financial statement information into their decision process. Additionally, results of this study indicate that companies who have audits performed by auditors who are perceived to possess greater integrity, expertise and independence likely enjoy reduced costs of borrowing.
For more information on this study, please contact F. Todd DeZoort.
DeZoort, F.T., T. Holt, and M.H. Taylor. 2012. A test of the auditor reliability framework using lenders’ judgments. Accounting, Organizations and Society 37 (8): 519-533.
Our study evaluates a provision of Dodd-Frank which provided permanent exemption from Section 404b compliance to non-accelerated filers. Our results show that these small firms did not improve their reporting quality to the same extent as large firms implying that the Dodd-Frank exemption will probably serve to keep the reporting quality of the exempted firms at lower than achievable levels.
We also note that as part of the Dodd-Frank legislation, the SEC was given a mandate to investigate raising the Section 404b exemption requirements from $75 million to $250 million in market capitalization (Dodd Frank 2010). While the SEC eventually decided to leave the exemption criterion at $75 million, this matter is still considered to be an open topic (SEC 2011). Our study informs this ongoing debate.
For more information on this study, please contact
Anthony D. Holder, PhD, CPA
Assistant Professor, Department of Accounting - MS 103
University of Toledo
Toledo, OH 43606-3390
Email: Anthony.Holder@utoledo.edu
Web: http://homepages.utoledo.edu/aholder4/
Phone: 1.419.530.2560
Fax: 1.419.530.2873
Holder, A., K. Karim, and A. Robin. 2013. Was Dodd-Frank Justified in Exempting Small Firms from Section 404b Compliance? Accounting Horizons 27 (1): 1-22.
The results of this study are important to policy makers, academics, and audit committees in evaluating the implications of independence rules for public companies. The evidence gathered indicates several areas where policy makers could evaluate the effectiveness of the existing independence requirements, or even modify the requirements without sacrificing audit quality or auditor independence – either in fact or in appearance. Both academics and policy makers could also benefit from additional research in certain areas of auditor independence to more clearly determine the impact of established policies or potential effects of future policies. Audit committees can also utilize the study to understand the results of prior research performed on the expanded role of the audit committee and the impact of that role on auditor independence.
For more information on this study, please contact any of the authors.
Gramling, A., J. G. Jenkins, and M. H. Taylor. 2010. Policy and research implications of evolving independence rules for public company auditors. Accounting Horizons 24 (4): 547-566.
This study shows that in practice the independent regulatory bodies implemented after the scandal of Enron and the collapse of Arthur Anderson are influenced by the accounting profession, despite their claim of independence. The Big Four firms are exerting a great influence on them, while the interest of the public only takes a small place in the discussion. Regulatory regimes thus face the challenge to ensure that the institutions they created fulfill the role they were given.
For more information on this study, please contact Bertrand Malsch.
Malsch, B. and Y. Gendron. 2011. Reining in auditors: On the dynamics of power surrounding an “innovation” in the regulatory space. Accounting, Organizations and Society 36 (7): 456-476.
The primary contribution of this study is finding that status-related concerns can prevent firms from appointing AFEs to their boards. This result has clear implications for regulators, as firms without AFEs are more likely to encounter accounting reporting problems. Specifically, recent regulation changes by the SEC to introduce a more broad definition of “financial expert” may damage the improvement of financial reporting that was intended by SOX. This research is consistent with previous findings that directors’ concerns for firm status and their own welfare can negatively affect accounting reporting quality.
Erkens, D. H., and S. E. Bonner. 2013. The Role of Firm Status in Appointments of Accounting Financial Experts to Audit Committees. The Accounting Review 88 (1): 107–136.
The findings of this study shed light on the perceived benefits and detriments of the five versus seven year partner rotation requirements. The results highlight the potential unintended consequences of implementing the accelerated rotation including a reduction in partner quality of life and auditor independence and audit quality.
For more information on this study, please contact Brian Daugherty.
Daugherty, B., D. Dickins, R. Hatfield, and J. Higgs. 2012. An Examination of Partner Perceptions of Partner Rotation: Direct and Indirect Consequences to Audit Quality. Auditing: A Journal of Practice & Theory 31 (1): 97-114.
This paper added to the discussion on what types of services audit firms should and should not provide to their audit clients. The evidence in this paper supports the view that investors do not view tax services provided to audit clients in the same light as audit-related services. The findings of this study are relevant to managers and boards of directors who purchase non-audit services (audit-related, tax or other) from the external auditor. This study is also useful to practicing auditors to address audit committee concerns on non-audit services.
Mishra, S., K. Raghunandan, and D.V. Rama. 2005. Do Investors’ Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting. Auditing: A Journal of Practice & Theory 24 (2): 9-25.