Has SOX Affected the Association between Fee Dependence and Auditors’ Going-Concern Opinions?

Recently, Li (2009) reports that an auditor’s going-concern decision is unaffected by pressure from her economically important clients in 2001, but is positively affected in 2003. Li attributes these findings to enhanced auditor independence under the Sarbanes-Oxley Act (SOX) of 2002. However, this interpretation seems premature, as failures to issue going-concern reservation are generally regarded as a serious violation of independence which auditors will try and avoid even before the passage of SOX. Moreover, several audit-related SOX provisions did not become effective until 2003. Our study sheds light on Li’s (2009) surprising findings by extending her post-SOX period to 2007 and conducting parallel analyses using a more comprehensive logistic regression model developed by DeFond, Raghunandan and Subramanyam (2002). Unlike Li (2009), we fail to find any association between the incidence of going-concern opinions and economic bonding using either model in 2004–2007. Her findings for 2003 are also very sensitive to model specification and sample choice. We then add to the models an interaction term between economic bonding and an indicator variable, denoting firms with high non-audit service fees in 2001 and hence most affected by SOX. This term is insignificant in 2003–2007, implying that SOX has not improved independence even for targeted firms. Expanding Li’s model to include five additional control variables in DeFond et al. (2002) yields qualitatively similar results as DeFond et al. Thus, the phenomena identified by Li (2009) appear to reflect auditors’ response to the aftermath of accounting scandals and/or the publicity surrounding SOX