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Has Sarbanes-Oxley Act curtailed the growth in auditor compensation or just changed its composition? A look at more recent evidence

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Abstract

This study takes a look at the rise in the total auditor compensation that has taken place over the past several years after the passage of Sarbanes-Oxley Act (SOX). Prior research, with the exception of a few studies, has mostly focused on the possible harmful effects of non-audit service fees on the auditor's independence. The results of those studies have been mixed, with more studies concluding that non-audit service fees threaten auditor independence. In response to such findings, the government has passed legislation (SOX) banning companies from purchasing certain non-audit services from their audit firms with a view to reducing the economic ties between a client and its auditor. However, the published data from a sample of companies show that while the amounts of non-audit fees received by audit firms have declined over the last several years, the overall auditor compensation has increased during the same period, even significantly in several cases. In most cases, the rise in the total auditor compensation has been caused by a significant rise in the audit fees paid by a company to its audit firm. The current study examines this rise in the total compensation paid by a sample of companies that are the audit clients of the Big Four CPA firms and finds that SOX has not really succeeded in reducing the economic bonding between a company and its auditor. Moreover, as total auditor compensation indicates a flow of money from clients to auditors, regardless of the service for which the money is being paid, the authors suggest that studies involving the issue of auditor compensation and its potential impact on auditor independence should focus primarily on the total auditor compensation and not just a segment of it such as non-audit service fees.

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Notes

  1. This is a newly introduced category of auditor compensation (SEC, 2003).

  2. The SEC has revised a few times its rule pertaining to the compliance with Section 404 of SOX. The earlier versions of the rule required an auditor to express an opinion on management's assessment of the effectiveness of the internal control over financial reporting, a requirement that was removed later in 2007 via SEC Rule 33-8809. For the purpose of this research, we are making a reference only to the rule released in February 2004, which for the first time set a definite starting date for the implementation of Section 404 requirements for large companies.

  3. AuditAnalytics® provides the details of benefit plan-related fees in a separate column. Benefit plan-related fees are fees paid in connection with audits of employee benefit plans. These fees may be combined under ‘audit-related fees’ in the corporate disclosures.

  4. Before the prohibition on the provision of the Financial Information Systems Design and Implementation (FISDI) services by the independent auditor, auditor compensation disclosures included a category for FISDI fees.

  5. Before the year 2003, there were Big Five CPA firms in the audit market. After Arthur Andersen, LLP, was dissolved in 2002, many companies that had Arthur Andersen, LLP, as their audit firm switched to one of the other Big CPA firms. We also eliminated such companies from our sample to concentrate only on those that remained with the same Big CPA firm over the fiscal years 2002–2007.

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1obtained his DBA from Louisiana Tech University and is CPA (LA-not practicing) and CMA. He has been teaching financial and managerial accounting at both undergraduate and graduate levels for more than 15 years and currently is the Associate Dean in the School of Business at Adelphi University in Long Island, New York. Before entering academia, he worked in public accounting and industry. He has authored or co-authored several articles on accounting and related topics that have appeared in both academic and professional journals.

2obtained his JD from University of Pittsburgh and is CPA (Maryland). He has been teaching tax, business law and financial accounting at the undergraduate level for more than 15 years and is currently a Lecturer of Accounting at the Stetson School of Business and Economics, Mercer University in Atlanta, Georgia. He is a licensed attorney in both Pennsylvania and the District of Columbia. He has authored numerous articles for both practitioner and academic journals.

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Pandit, G., Rubenfield, A. Has Sarbanes-Oxley Act curtailed the growth in auditor compensation or just changed its composition? A look at more recent evidence. Int J Discl Gov 8, 31–42 (2011). https://doi.org/10.1057/jdg.2010.5

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  • DOI: https://doi.org/10.1057/jdg.2010.5

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