Has Sarbanes-Oxley Act curtailed the growth in auditor compensation or just changed its composition? A look at more recent evidence

Abstract

This study takes a look at the rise in the total auditor compensation that has taken place over the past several years after the passage of Sarbanes-Oxley Act (SOX). Prior research, with the exception of a few studies, has mostly focused on the possible harmful effects of non-audit service fees on the auditor's independence. The results of those studies have been mixed, with more studies concluding that non-audit service fees threaten auditor independence. In response to such findings, the government has passed legislation (SOX) banning companies from purchasing certain non-audit services from their audit firms with a view to reducing the economic ties between a client and its auditor. However, the published data from a sample of companies show that while the amounts of non-audit fees received by audit firms have declined over the last several years, the overall auditor compensation has increased during the same period, even significantly in several cases. In most cases, the rise in the total auditor compensation has been caused by a significant rise in the audit fees paid by a company to its audit firm. The current study examines this rise in the total compensation paid by a sample of companies that are the audit clients of the Big Four CPA firms and finds that SOX has not really succeeded in reducing the economic bonding between a company and its auditor. Moreover, as total auditor compensation indicates a flow of money from clients to auditors, regardless of the service for which the money is being paid, the authors suggest that studies involving the issue of auditor compensation and its potential impact on auditor independence should focus primarily on the total auditor compensation and not just a segment of it such as non-audit service fees.