The effect of SOX on audit quality

Publication Date02 Jul 2019
AuthorMoo Sung Kim,Jagadish Dandu,Perihan Iren
The eect of SOX on audit quality
Moo Sung Kim
College of Business, Zayed University Abu Dhabi Campus,
Abu Dhabi, United Arab Emirates
Jagadish Dandu
Zayed University, Dubai, United Arab Emirates, and
Perihan Iren
College of Business, Zayed University Abu Dhabi Campus,
Abu Dhabi, United Arab Emirates
Purpose This paper aims to investigatetwo issues. First, the authors test the effect of the SarbanesOxley
Act (SOX) on audit qualityafter 10 years. Second, the authors test whetherit was necessary to close all of the
Arthur Andersenofces due to the misbehavior of a few (e.g. the Houston and Atlanta ofces).
Design/methodology/approach The authors have used conservatism (Basu) as a proxy for audit quality.
Findings The authors nd that, over the long run (10years) after SOX a doption, there is a signicantpositive
change in conservatism as compared to during the previous similar period. In addition, the authors nd that only
6 of the 20 city-level ofces of Arthur Andersen were less conservative than were their other Big 6 competitors in
thesamecity.Furthermore,theresults also suggest that some city-level ofces of Arthur Andersen were engaged
in more conservative accounting practices than were their competitors and the Houston Andersen ofces.
Originality/value This study documents, using empirical evidence, that the implementation of SOX is
successful, and that one factor that helped lead to this success might be the harsh punishment on Arthur Andersen.
Keywords SOX, Arthur Andersen, Audit conservatism, Big 6
Paper type Research paper
1. Introduction
After the passing of the SarbanesOxley Act (SOX) in 2002, we have encountered two
research questions. The rst is whether SOX has really succeeded in improving audit quality
in the long run, and the second is whether the punishment for Arthur Andersen was too harsh.
A signicant amount of the empirical evidence on the benets of SOX on audit quality
has been reported (Cohen et al., 2008;Daniel et al.,2008;Dyck et al., 2010;Lobo and Zhou,
2006). However, there are someshortcomings of such evidence. First is the timing effect. The
majority of the existing literaturein this area is based on the short-term period, immediately
after SOX implementation.During this period, the benets gained in terms of improvements
in audit quality may not entirely be the result of SOX itself. Rather, it could be market
discipline and/or a combinationof complementary provisions contemporaneously provided,
such as changes in the stock exchange guidelines (Coates and Srinivasan, 2014). Second is
the tendency of managers. The managers in a rm are likely to exploitto their benet from
low audit quality eventhough any new rules imposed on them. A signicant amountof time
may be needed to nd loopholes and circumvent the new rules. Additionally, as time goes
by, both external and internal monitoring could be loosened. Thus, the audit quality of a
JEL classication G14, G38, M41, M42, M48
The eect
of SOX
Journalof Financial Crime
Vol.26 No. 3, 2019
pp. 897-909
© Emerald Publishing Limited
DOI 10.1108/JFC-08-2018-0088
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