The effect of SOX on small auditor exits and audit quality

Mark L. DeFond; Clive S. Lennox

doi:10.1016/j.jacceco.2011.03.002

The effect of SOX on small auditor exits and audit quality

Mark L. DeFond, Clive S. Lennox

Management

Research output: Contribution to journal › Article › peer-review

230 Citations (SciVal)

Abstract

We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.

Original language	English
Pages (from-to)	21-40
Number of pages	20
Journal	Journal of Accounting and Economics
Volume	52
Issue number	1
DOIs	https://doi.org/10.1016/j.jacceco.2011.03.002
Publication status	Published - 1 Jun 2011

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10.1016/j.jacceco.2011.03.002

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AB - We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.

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The effect of SOX on small auditor exits and audit quality

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