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

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 fi ndings, the government has passed legislation (SOX) banning companies from purchasing certain non-audit services from their audit fi rms 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 fi rms have declined over the last several years, the overall auditor compensation has increased during the same period, even signifi cantly in several cases. In most cases, the rise in the total auditor compensation has been caused by a signifi cant rise in the audit fees paid by a company to its audit fi rm. 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 fi rms and fi nds that SOX has not really succeeded in reducing the economic bonding between a company and its auditor. Moreover, as total auditor compensation indicates a fl ow 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.

Auditor Fees and Fraud Firms

“…Some studies find that investors view NAS fees/total fees negatively (e.g., Gul et al , Higgs and Skantz and Khurana and Raman ). Other studies (e.g., Pandit and Rubenfield and Markelevich, Hoitash, and Barragato ) suggest that there is recent anecdotal evidence that as a result of the post‐SOX reduction in the kinds of services an auditor may provide, declining NAS fees are being offset by increases in audit fees. We would thus expect that economic bonding in the post‐SOX era is more likely to result from higher audit fees than higher NAS fees.…”

Restricting Non-Audit Services in Europe – The Potential (Lack of) Impact of a Blacklist and a Fee Cap on Auditor Independence and Audit Quality

“…Moreover, the lack of non-audit fee income may lead to an increase in audit fees, potentially to maintain high audit quality (e.g. Higgs & Skantz, 2006), although high audit fees may present an economic incentive for the auditor which might impair (perceived) auditor independence, regardless of the existence of non-audit fees (Antle et al, 2006;Choi, Kim, & Zang, 2010;Holland & Lane, 2008;Khurana & Raman, 2006;Pandit & Rubenfield, 2011). The criteria of recurring vs. non-recurring engagements and their effects on auditor independence (Schneider et al, 2006) and audit quality remain…”

“…This safe-route approach may over-compensate threats to perceived independence and, thus, work against the auditor's and investors' interest (Gaynor, McDaniel, & Neal, 2006). In turn, this approach is often accompanied by higher audit fees (Abbott, Parker, Peters, & Raghunandan, 2003b;Ghosh & Pawlewicz, 2009;Pandit & Rubenfield, 2011). This finding can partly be attributed to amendments of SOX which have imposed additional requirements for the audit (Ghosh & Pawlewicz, 2009;Griffin & Lont, 2007).…”