Sarbanes-Oxley Section Effect on Audit Fees

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Isolating Sarbanes-Oxley Section 404(b) effect on audit fees and market liquidity: a natural experiment.

Premalata Sundaram* PDBP 2010 University of Florida

August 23, 2010

Since the passage of the Sarbanes-Oxley Act (SOX) of 2002, a large body of evidence has accumulated on the costs this legislation has imposed on public companies in the United States. Estimates of the direct costs of the law have been fairly straightforward to measure, but the indirect costs of the legislation like incremental audit and non-audit fees, additional audit effort and additional internal control audit expenses like payroll and technology are harder to estimate due to lack of detailed data on these expenses. Since audit fees had been
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One must therefore assume that all of the increase in compliance costs post Section 404 is due to a mix of increased audit effort, higher auditor liability risk and higher internal audit costs. Raghunandan & Rama(2006) study the audit fee component of SOX Section 404 compliance by US firms using data on a sample of manufacturing companies from Jan 2003 to Sep 2005. They find that the mean total compliance costs is $2.2 million among the firms that voluntarily disclosed this information.2 (Bedard, Carson and Simnett 2009) study the relationship between cross-listing and the pricing of audit


Accelerated filers (companies with more than $75 million in public float) were required to adopt Sec 404 for fiscal year end on or after Nov 15, 2004. Other companies had a later compliance deadline of July 15, 2007. The implementation date for non-­‐accelerated filers was again extended to fiscal year end Dec 15, 2008. Foreign private
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