The Effects of Section 404 of Sarbanes-Oxley Act of 2002 on the Audit Fees of Foreign Firms Listed on U.S. Exchanges

Section 404 of Sarbanes-Oxley Act requires firms to report on the effectiveness of their internal control over financial reporting. The Securities and Exchange Commission requires foreign large accelerated filers to provide both management and auditor Section 404 reports starting for fiscal years ending on or after July 15, 2006. This study examines the change in audit fees for foreign firms in their first year of providing auditor attestation reports for fiscal years ending between July 15, 2006 and July 14, 2007. During this time period, only foreign large accelerated filers have to provide both management and auditor Section 404 reports. Foreign accelerated filers only have to provide management Section 404 reports and non-accelerated filers do not have to provide any Section 404 report. We find that foreign large accelerated filers have an average of 74% increase in audit fees in this first year of Section 404 compliance, while the foreign accelerated filers and non-accelerated filers only have increases in audit fees of 33% and 42%, respectively. We also find that the increase in audit fees among foreign large accelerated filers is negatively associated with the strength of the legal environment in their home countries