Audit fee premium and auditor change: the effect of Sarbanes‐Oxley Act

Purpose – 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. Design/methodology/approach – The audit fee premium model is employed to track the trend in audit fee premium between 2000 and 2006 for small accelerated filers compared with large accelerated filers and non‐accelerated filers and how the change in auditor affected such trend around the enactment of SOX. Findings – The results indicate a significant shift in audit fee premium during early years of SOX compliance especially for small accelerated filers compared with large accelerated filers or non‐accelerated filers. Such shift started to wind down during 2006 after the initial application of SOX requirements. Although clients who switched from big to non‐big auditors have experienced a slower increase in their audit fees, these fee savings are lower for small accelerated filers during 2004 and 2005 with the increasing demand for audit services in the US audit industry during these years. Practical implications – 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, practitioners and researchers should factor these costs and benefits over a sufficient time horizon. Originality/value – More comprehensive analysis of SOX effects on the US audit industry not only in the short run during early compliance years, but also in the longer run after the initial setup process.