SOX 404(b) exemption effects on auditor changes

Abstract

Purpose This paper aims to investigate whether the Sarbanes-Oxley Act: Section 404(b) exemption caused an increase in auditor changes due to changes in expectations for both auditors and their clients. Design/methodology/approach This paper predicts that this exemption caused a significant amount of auditor changes post-exemption, due to a change in expected future economic rents (audit scope demands) for auditors (clients). Logistic regression analysis is used to examine whether auditor changes increased for non-accelerated filers (public companies with less than $75 million in public float), who were affected by this exemption, compared to auditor changes for accelerated filers (public companies with greater than $75 million in public float), who were not affected by this exemption. Findings The results show a significant positive association between the exemption and auditor dismissals for non-accelerated filers compared to that of accelerated filers. This finding is robust when sensitivity tests are used. Practical implications Prior literature finds that an increase in auditor changes can have various positive and negative effects on the affected companies. Thus, investors will be interested in the results of this paper when making their investment decisions with regard to non-accelerated filers. Social implications The results of this paper will aid policymakers as they consider the pros and cons of this exemption, as it pertains to the affected companies. Originality/value This paper is the first to study the effects of this exemption on auditor turnover for the affected companies.