INTERNATIONAL JOURNAL REVIEW

Kharisma Baptiswan
9B DIV Akuntansi Khusus, STAN, Tangerang Selatan
kharisma.baptiswan@gmail.com

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1 Title Audit Fee Premium and Auditor Change: The Effect of Sarbanes-Oxley Act
1

2 Research
question
How are the effects of Sarbanes-Oxley Act (SOX) implementation on both audit fee premium
and auditor change in the US audit market?
3 Motivation The purpose of this paper is to provide more comprehensive analysis of the effects of
Sarbanes-Oxley (SOX) Act on both audit fee premium and auditor change in the US audit
market.
4 Theory Audit fee is a fee for basic auditing procedures and audit fee premium (premium audit fee) is
incremental cost caused by sales-power by big auditing firms. Compliance of SOX has made
many companies, especially the small ones, to shift their audit activity to smaller auditor
firms. This changes results from an increase of premium audit fee related to additional tasks
that all firm must comply, e.g. deeper understanding and assessment of internal control
adequacy for financial reporting. The trend of these auditor changes was expected to result in
cheaper (less increase) audit cost and ultimately less burden audit fee for companies. But in
subsequent period after SOX compliance, studies suggest that both companies and auditors
have become more efficient in complying with SOX requirements (PricewaterhouseCoopers,
2005; Ernst & Young, 2005).
5 Hypothesis 1. Audit fee premium expected to significantly increase after the enactment of the SOX in
2002 especially for small accelerated filers,
2. Companies that changed from big audit firms to non-big audit firms have experienced
less increase in their audit fees after the SOX especially for small accelerated filers,
3. Compliance cost may decrease in the longer run as a result of streamlining the process,
the need for less documentation, and the focus on key controls.
6 Methodology The audit fee premium model is employed to track the trend in audit fee premium between
2000 and 2006 for small accelerated filers
2
compared with large accelerated filers
3
and non-

1
Sarbanes-Oxley Act of 2002 is an act to increase accountability and responsibility of US public companies sponsored after financial
fraud of several highlighted US companies such as Enron and WorldCom.
2
Small accelerated filer is a public company that meets all of the following conditions as of the end of its fiscal year:
The company's public float was $75 million or more as of the last business day of its most recently completed second fiscal quarter.
The company was subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act for at least 12 calendar
months.
The company previously filed at least one annual report to stockholders under Section 13(a) or 15(d) of the Exchange Act.
The company is not eligible to rely on the smaller reporting company requirements for its annual and quarterly reports.
3
Large accelerated filers is a public company that meets all of the following conditions as of the end of its fiscal year:
The company's public float of its common equity was $700 million or more as of the last business day of its most recently completed
second fiscal quarter.
The company has been subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act for at least 12 calendar
months.
accelerated filers
4
and how the change in auditor affected such trend around the enactment of
SOX. Basic audit fee premium model that was used in this paper was as follows:
Fi = Xi + BIGi + i
Whereas formula speciffically design for this paper is as follows:

By analysing statistical trend, some evidences of effect of SOX implementation were found.
7 Sample object Data used in this research was taken from Audit Analytics
5
and Compustat
6
. Audit analytics
database was used to obtain data about audit and non-audit fees and auditor changes during
these years. Other financial data necessary to estimate other variables in both audit fee
premium and audit fee change models were obtained from Compustat
7
annual files for the
corresponding year. Objects are non-accelerated filers, accelerated filers (small) and large
accelerated filers.
8 Results 1. Audit fee for accelerated filers and larger accelerated filers are higher, especially at its
sharpest rise in 2004 when SOX was enacted,
2. Growth rate of audit fee was higher in small accelerated filers than larger ones during
SOX implementation,
3. The audit fee premium has its sharpest increase in year 2004 and begin to dwindle in
2006. This suggests that both companies and auditors are begin to learn efficiently to
allocate its resources necessary for SOX compliance, e.g. streamline their internal control
documentation and testing processes,
4. Audit fee is significantly higher for clients with higher sales, larger clients, clients
reporting extraordinary items, clients reporting net loss, and those with foreign
operations, and significantly negatively related to clients profitability.
9 Implications 1. With the increasing demand of audit services in the US audit market during early years
of SOX compliance, auditors had to significantly intensify their understanding of
companies internal control effectiveness and increase their audit fees to cover the cost of
increasing resources directed to their audit engagements especially those engagements
that involve smaller, more risky, or increasingly less profitable clients,

The company has previously filed at least one annual report to stockholders under Section 13(a) or 15(d) of the Exchange Act.
The company is not eligible to rely on the smaller reporting company requirements for its annual and quarterly reports.
4
Non-accelerated filers is a public company that does not meet the requirements to be an accelerated filer or a large accelerated filer.
5
Audit Analytics is an innovative on-line public company intelligence service available from the Ives Group Inc, a leading
independent research provider focused on the accounting, insurance, regulatory, legal and investment communities
(http://www.auditanalytics.com/0000/, accesed in 13/05/2014).
6
Compustat is a database of financial, statistical and market information on active and inactive global companies throughout the world
and part of Division of S&P Capital IQ, which is a division of McGraw Hill Financial (https://www.capitaliq.com/home/what-we-
offer/information-you-need/financials-valuation/compustat-financials.aspx, accesed in 13/05/2014).

2. As both clients and auditors develop their documentation and audit processes necessary
to comply with SOX, incur any setup and initial investment costs, and streamline their
processes, the audit fees and the audit fee premium is starting to wind down,
3. There is an increasing trend to switch from a big auditor to a non-big one and within the
non-big segment during the early years of SOX compliance.
10 Limitation The study limit the sample only to the data availability of the items necessary to conduct the
analysis and run the models above in both Audit Analytics and Compustat databases between
the years 2000-2006, thus its not future proof.
11 Future research The compliance costs of significant regulatory changes like SOX may be upfront loaded but
their benefits are long-term benefits in terms of higher quality of financial reporting and
better internal controls over financial reporting. When analyzing the effects of such regulatory
changes for future research, practitioners and researchers should factor these costs and
benefits over a sufficient time horizon.
12 Commentary Research was done nicely and it contained robust data about audit activity patterns (fee
growth and audit changes overview) in the US. All of hypothesis were proven by analysing
many trends regarding linkage between audit and its element and environment (SOX
enactment). Enactment of SOX in US is expected to increase audit quality by internal control
enhancement and stakeholders confidence in companies to which they invested their money.
Reviewer also thinks that this reserach also do not take into account any consideration
regarding clients and auditors effort to find loopholes in SOX enactment that could
significantly decrease compliance cost. This paper also lack of insight regarding cost and
benefit of SOX and both preferences of clients and auditors regarding SOX.
Financial disaster happened in the US in 2008, have given us sound messages that checks and
balances expected by SOX were not functioning properly. That time shareholders were
grievely devastated. Deregulation, financial reengineering, short-term focused executives
bonuses and low ethical conduct of some corporation are things that should be reviewed.
Reviewer believes that auditing still has many to give to create trusts for and from
shareholders. Maybe further research could give us a better insight into what quality auditing
has for these matters.