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First Draft The Impact of Sarbanes Oxley-Act on Audit Fees and the Quality of Financial Reporting Trinh Nguyen Prof. Ping Wang Abstract The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress on the 30 July 2002 with the intention to improve the quality of financial reporting and to protect investors from high possibilities of fraudulent activities. This study will attempt to confirm the hypotheses that: · The adoption of the Sarbanes-Oxley Act is associated with the increase in the audit fees. · The implementation of the Sarbanes-Oxley Act has contributed to the reduction of the accounting frauds The research will collect data from publicly traded US-based companies over the longest period available. Then, statistical methods will be employed to support or reject the hypothesis. Thus, the study will help to assess the outcomes of the implementation of the Sarbanes-Oxley Act. The study has supported the first hypothesis that audit fees have increased with the implementation of the Sarbanes-Oxley Act. It appeared that large filers, which used the services of the Big 4 audit companies, have experienced the most significant increase in the audit fees, which was accompanied by the decline in the volume of non-audit fees. At the same time, small companies have shown an opposite trend. The results of the analysis did not confirm the second hypothesis. Thus, it was possible to conclude that the adoption of SOX provisions did not significantly reduce the number of accounting frauds and weaknesses in internal controls. This research has practical implications and can serve as a foundation for further studies. This study suggests that the long-term benefits of the implementation of such changes outweigh the expenses. Therefore, the practitioners and researchers should focus on the analysis of the costs and benefits during a sufficient time horizon. Contents 1.Introduction4 2.Literature Review and Hypotheses Development5 2.1.Literature Review5 2.2.Hypotheses Development8 3.Research Design and Sample9 3.1.Data9 3.2.Research Design9 4.Results11 4.1.Audit Fees11 4.2.Audit Frauds and Breaches14 4.3.Audit Fees16 4.4.Audit Frauds and Breaches17 5.Conclusion17 Tables21 Table 1. The changes of the audit fees21 Table 2. 2000-2004 fees analysis22 Table 3. Regression analysis22 Table 4. The changes in audit fees by auditors24 Table 5. Number of identified fraud cases and not effective accounting rules and procedures25 Table 6. Regression analysis for fraud cases25 Table 6. Regression analysis for accounting weaknesses26 Table 7. Regression analysis for failures of internal controls and frauds27 References28 1. Introduction The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress on the 30 July 2002 with the intention of protecting investors from high possibilities of fraudulent activities by corporations in the accounting industry. This Act is also known as Corporate Responsibility Act of 2002. Due to previous accounting Malpractice in the early 2000s, the act was established as a response to such malpractices. The Sarbanes-Oxley Act of 2002 came up with Public Company Accounting Oversite Board with the intention of overseeing the accounting Industry by removing company loans to executives and enhanced job protections of those exposing any kind of illegal activities in the companies. This act nourishes the independence and financial prudence of corporate boards by holding CEO personally liable for accounting audits errors. It is important for users to understand the purpose of the Sarbanes-Oxley Act of 2002 as well as its effects, both the benefits and cost compliance, on both public corporations and private corporations to the audit fee. The aim of this research is to equip users about the Sarbanes-Oxley Act, the audit fees which results from compliance with the act as well as the benefits in audit fees, if any. Instead of focus on the effect of Sarbanes-Oxley Act of 2002 on public or private corporations, this research will focus on the effects on both private and public corporations and the different audit fee arising from compliance in the two corporations. During the post-Sarbanes-Oxley Act of 2002, there was a high level of reported corruption and fraudulent Financial reporting which led to the establishment of this Act. The purpose of the Accounting standards is to provide fair-presentation of Financial Information and this information is prepared truthfully and reliably to the users/investors. The Sarbanes-Oxley Act thus provides for the protection of the investors and reporting of non-fraudulent Financial Information. This paper inspects the behavior in audit fees as an effect of the implementation of the Act. The implementation of Sarbanes-Oxley Act of 2002 was a response to the high level of reported corruption and fraudulent activities. There has to be a comparison between the amount of corruption reported in the public corporation prior to Sarbanes-Oxley Act and after. Since the purpose of the Sarbanes-Oxley Act of 2002 was to enhance the quality of financial reporting, eliminate fraudulent activities and to protect investors from corruption in the public corporations, it is important to examine whether this purpose is being achieved. The public corporations seem to be focused more on the costs as a result of this act and less on the quality of financial reporting. The implementation of Sarbanes-Oxley Act of 2002 was a response to the high level of reported corruption and fraudulent activities. There has to be a comparison between the amount of corruption reported in the public corporation prior to Sarbanes-Oxley Act and after. Therefore, this study will examine the following questions: Question 1: What is the difference in audit fee costs before the Sarbanes-Oxley Act and after? Question 2: How the implementation of the Sarbanes-Oxley Act of 2002 has affected the number of illegal activities associated with financial reporting? The lack of understanding of the Audit standards may cause an increase in audit fees as the Sarbanes-Oxley Act requires more items to be reported in the financial information. The amount and standards required for reporting prior the implementation of the Act may need to be compared to those after the implementation. The purpose of the law is to ensure that corporation operate in the best interest of the economy and this implies that corporations are expected to operate efficiently at a foreseeable future. The Act is thus misinterpreted or the Auditing standards are being misunderstood. 2. Literature Review and Hypotheses Development 2.1. Literature Review Previous researches perceive a high level of standard exercise as the footpath towards effectiveness of Sarbanes-Oxley Act and are mostly focused on the increase in Audit fees as a result of compliance with the act. October 2006 - Media coverage and discussions of the costs of compliance with the Sarbanes-Oxley Act (SOX) and the cost of audits in general are inescapable—to the point that many believe that SOX needs to be repealed or the economy will be doomed (Ciesielki J.T.et al, 2019). It is believed that by not being able to specify the audit fees incurred as a result of compliance in the financial statements, the corporations have no prove to provide the investing public on the costs being greater than the benefits of compliance. Between 2001 and 2004, total audit and audit-related fees increased 103% for 496 of the S&P 500 companies (Ciesielki J.T.et al, 2019). These are the periods where the Sarbanes-Oxley Act was passed. It is also believed that there are companies that did not have any available information in 2004. Ciesielki J.T.et al, (2019) shows a second look on the increase in the audit fees as related to the quality of financial information provided. It seems the financial information released during the periods 2001-2004 contain information that were previously not disclosed. It was the first time since 1981 that such information was reported. Initially, there were only three classifications of fees: “audit fees,” “financial information systems design and implementation fees,” and “all other fees.” The categories were revamped in 2002, effective for 2003 financials (Ciesielki J.T.et al, 2019). Kelli Home conducted a study that inspects the relationship of audit partner rotation to fraud of financial reporting prior to the Sarbanes-Oxley traditional environment. It was believed that a high level of fraudulent activities were being reporting in the Financial information and investors did not have sufficient protection with regards to these fraudulent activities, thus the Sarbanes-Oxley act was establish with the intention of providing investors with such protection right. The lack of quality in financial reporting was major concern in the industry. The study of “the effects of tenure and audit fees on fraudulent financial reporting” was based on a number of hypothesis and the first hypothesis concludes that in the presence of long tenure, there are higher levels of fraudulent reporting. The second hypothesis concludes that when data are compared between pre SOX inferred rotation and post SOX mandatory rotation, the implementation of the auditor partner rotation regulation has had a positive effect in reducing the likelihood of fraudulent financial reporting (Horne K, 2015). The third hypothesis concludes that Audit fees do not moderate the association between fraudulent financial reporting and Auditor partner tenure (Horne K, 2015). Scandals in the corporate world of the 21st century made the public more aware of the corruption and there was a need for change in the audit standards in order to reassure the public on the accuracy of financial statements. President Bush passed the Sarbanes-Oxley Act of 2002 to try to bring about reform and correction to the auditing practice and bring integrity back to the leaders of the public Companies (Beck B, 2006). The study of Beckley Beck collected information with the hope that when auditors familiarize themselves with the integrated audit and from their experience of contacting internal controls from 2002 throughout 2005 fees would thus be reduces. The results showed a very different picture when dealing with total fees and audit fees. Average total fees increased from $5,761,632 to $8,454,771 and Median total fees increased from $5,566,530 to $6,371,184 from 2002 to 2005 respectively (Beck B, 2006). Beck (2006), mentions that the results are inconsistent with his hypothesis as he had anticipated that fees would have started to decrease in 2005. Beck 2006 further concludes that The Sarbanes-Oxley Act of 2002 greatly affected the role of the independent auditor. Washburn (2017) in “The effects of auditing standards No. 5 on audit delay and audit fees” Conducted a research to inspect how effective the audit standard No 5 in reducing audit delays and decreasing audit fees as a goal of protecting investors through audit oversight and Securities and exchange commission. The effectiveness of the Audit Standard 5 was determined by examining the audit delay and audit fees of the U.S. public traded firms from 2013-2017. However, results for the entire period of the study were inconsistent and thus it is not possible to assert that AS5 has met its primary objective of simplifying the audit process and thus reducing audit delay and audit fees (Washburn M, 2017). This study contributes positively in response to the high increase in audit fees as a result of the Sarbanes-Oxley Act as it focused on the audit standard that may assist in reducing these high fees, even though the results were inconsistent. The results of the above studies seem to be inconsistent,