The effect of SOX on audit quality
| Published date | 02 July 2019 |
| DOI | https://doi.org/10.1108/JFC-08-2018-0088 |
| Date | 02 July 2019 |
| Pages | 897-909 |
| Author | Moo Sung Kim,Jagadish Dandu,Perihan Iren |
The effect 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
Abstract
Purpose –This paper aims to investigatetwo issues. First, the authors test the effect of the Sarbanes–Oxley
Act (SOX) on audit qualityafter 10 years. Second, the authors test whetherit was necessary to close all of the
Arthur Andersenoffices due to the misbehavior of a few (e.g. the Houston and Atlanta offices).
Design/methodology/approach –The authors have used conservatism (Basu) as a proxy for audit quality.
Findings –The authors find that, over the long run (10years) after SOX a doption, there is a significantpositive
change in conservatism as compared to during the previous similar period. In addition, the authors find that only
6 of the 20 city-level offices of Arthur Andersen were less conservative than were their other Big 6 competitors in
thesamecity.Furthermore,theresults also suggest that some city-level offices of Arthur Andersen were engaged
in more conservative accounting practices than were their competitors and the Houston Andersen offices.
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 Sarbanes–Oxley Act (SOX) in 2002, we have encountered two
research questions. The first 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 significant amount of the empirical evidence on the benefits 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 benefits 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 firm are likely to exploitto their benefit from
low audit quality eventhough any new rules imposed on them. A significant amountof time
may be needed to find 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 classification –G14, G38, M41, M42, M48
The effect
of SOX
897
Journalof Financial Crime
Vol.26 No. 3, 2019
pp. 897-909
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-08-2018-0088
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
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