Investors' Perceptions of Auditors' Economic Dependence on the Client: Post-SOX Evidence

The authors revisit the client importance and auditor independence debate, and investigate whether investors' perceptions of the auditor's economic dependence has changed since the passage of the Sarbanes-Oxley Act of 2002 (SOX). Client importance is measured as the proportion of client nonaudit service fees, audit fees, or total fees to the total audit office revenue. Consistent with their hypothesis, they find a significant decrease in the association between both nonaudit services (NAS) and total fees, and the cost of equity from the pre-to the post-SOX period, indicating that investors' concerns over auditor independence have changed in the post-SOX period. In addition, the authors find some evidence of a positive and significant association between both audit fees (2003) and total fees (2004), and cost of equity in the post-SOX period. Overall, these results indicate that the independence requirements in SOX and/or the heightened litigation environment post-SOX have, to some extent, mitigated but not completely eliminated investors' concerns over the threat of economic fee dependence.