Discretionary Accrual Changes Following the Sarbanes-Oxley Act

We examine changes in discretionary accruals following the Sarbanes-Oxley Act (SOX). SOX imposes considerably greater potential penalties on CEO/CFOs who engage in financial wrongdoing; therefore, risk averse managers are likely to report lower earnings by reducing discretionary accruals following SOX. Our results indicate that (1) Canadian firms subject to SOX report lower discretionary accruals in the post-SOX period; (2) there is no regulatory spillover effect of SOX on Canadian firms not under the jurisdiction of SOX; (3) the impact of SOX on firms' conservative reporting through discretionary accruals in the post-SOX period is not homogeneous; it is more pronounced for firms that were aggressive in the pre-SOX period