AUDITING: A JOURNAL OF PRACTICE & THEORY Vol. 28, No. 1 May 2009 pp.

171190

American Accounting Association DOI: 10.2308 / aud.2009.28.1.171

Audit Fees for Initial Audit Engagements Before and After SOX
Hua-Wei Huang, K. Raghunandan, and Dasaratha Rama
SUMMARY: Legislators, regulators, and the media have expressed concerns that auditors lowball the fees for initial-year audits and that such fee discounts can lead to reduced audit quality. We hypothesize that initial-year audit fee discounts will be less likely in the post-SOX period than in the pre-SOX period. Using both fee-levels and fee-changes models, we nd that Big 4 clients receive initial-year audit fee discounts of about 24 percent in 2001; this nding is consistent with results from many prior studies that have examined various periods prior to SOX. However, we nd that in 20052006 Big 4 clients pay an initial-year audit fee premium of around 16 percent. We also document that the Big 4 are much less likely to serve as a successor, following an auditor change, in 20052006 than in 2001. Overall, the ndings suggest that concerns about initial-year audit fee discounts are not supported by empirical evidence in the post-SOX period. The results also suggest that the Big 4 have become more conservative in the post-SOX period with respect to client acceptance and pricing decisions.

INTRODUCTION n this paper we provide empirical evidence about audit fees for initial audit engagements before and after the Sarbanes-Oxley Act (SOX, U.S. House of Representatives 2002). Motivation for this study comes from the concerns expressed by legislators, regulators, and others about auditors discounting their initial-year audit fees, and the impact of such pricing practices on auditor independence and the quality of initial-year audits (U.S. Senate 1977, 2002; Levin 2002; Turner 2002a; Krantz 2002). The SEC (2000) expressed concern about initial-year audit fee discounts by noting:

When an auditor uses the audit as a loss leader, the auditor, in essence, low-balls the audit feeeven offering to perform it at a lossin order to gain entry ... Low-balling creates a variety of independence issues.

While such claims related to lowballing of audit fees continue to be made by some in the post-SOX period (e.g., Healy 2005; Williams 2007), others have noted that lowballing is Hua-Wei Huang is an Assistant Professor at SUNY at Old Westbury, and K. Raghunandan and Dasaratha Rama are Professors, both at Florida International University.
We thank the previous editor (Dan Simunic) and two anonymous reviewers for many helpful comments on earlier versions of this paper. Editors note: Accepted by Dan Simunic.

Submitted: November 2006 Accepted: July 2008 Published Online: May 2009

171

172

Huang, Raghunandan, and Rama

much less likely to be prevalent, if at all, in the post-SOX period (Brown 2002; Banham 2003). Prior research has analytically and empirically examined issues related to pricing of initial-year audits. DeAngelo (1981) suggests that incumbent auditors earn quasi-rents from clients due to the start-up costs (incurred by both auditors and clients) associated with new audits; such quasi-rents lead to lowballing of initial-year audit fees. Initial-year audits typically involve substantial additional effort from the auditor (Flanigan 2002; Turner 2002b), and to the extent the extra start-up costs are not passed along to the client in the form of additional fees, the extra costs may be viewed as an investment by the auditor, who expects future returns on such investment.1 This forms the basis for concerns expressed about the impact of lowballing on auditor independence, since an auditor who is concerned about future returns on an investment would be presumably more likely to go along with a client in order to maintain the auditor-client relationship (Geiger and Raghunandan 2002). For example, a former chief accountant of the SEC noted in SOX-related congressional hearings that auditors propose a lower fee in the rst year of an audit relationship in order to gain the account, and this has a negative impact on the quality of the rst-year audit (Turner 2002a). If the additional costs associated with an initial audit are not billed to the client, then the auditor may be tempted to cut back on the work, which then could lead to a lowerquality audit in the initial year (Glater 2002; Hirsch 2002). Lowballing (pricing below cost) of audit fees itself cannot be directly evaluated without knowledge of auditors costs. Nevertheless, many prior papers have examined if there is an initial-year audit fee discount, since such a fee reduction makes it more likely that there is lowballing. In the U.S. audit market, prior research has documented the existence of initialyear audit fee discounts (Simon and Francis 1988; Ettredge and Greenberg 1990). Craswell and Francis (1999) suggest that the existence of a price discount shown in prior studies could be due to the absence of public disclosures of audit fees (the SEC mandated such disclosures only for proxy statements led on or after February 5, 2001); using Australian data, Craswell and Francis (1999) are unable to nd a price discount for within same-tier audit switches. However, Sankaraguruswamy and Whisenant (2005) document that even after public disclosure of fees, there was price discounting for initial-year audit engagements in the U.S. Ghosh and Lustgarten (2006) show that while there were initialyear audit fee discounts for same-tier switches involving the non-Big 4 clients in each year from 2001 to 2003, such discounts for Big 4 clients disappeared by 2003. Given the signicant changes in the auditing profession following the enactment of SOX, we examine if initial-year audit fee discounts persist in the post-SOX period. There are at least ve reasons to expect that audit fee discounting for a new client would be less likely in the post-SOX period. First, it is likely that audit rms business models, cost structures, and pricing decisions would have signicantly changed post-SOX. Specically, in the post-SOX period audit rms are much more likely to have priced auditing as a stand-alone service (in light of SOXs

Initial-year extra costs are sunk costs, and economic theory suggests that such costs should be irrelevant, but prior research in organizational behavior (e.g., Staw 1976; Staw and Ross 1987) shows that people do not ignore such costs.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009

Audit Fees for Initial Audit Engagements Before and After SOX

173

restrictions related to nonaudit services); this implies that auditors would be less likely to lowball audit fees in order to obtain the clients nonaudit service contracts.2 Second, if audit rms became more conservative in the period after SOX (Bryan-Low 2003), then it is likely that the fee changes following auditor changes would be different before and after SOX. If auditor changes are viewed with suspicion by nancial statement users, and if problems are more likely to occur in initial audits (Glater 2002), then the changed environment of auditing in the post-SOX era suggests that fee discounts following auditor changes would be less likely to be observed in the post-SOX period than in the pre-SOX period. Third, Section 301 of SOX changed the location of authority for selecting the external auditor. Prior to SOX, company management selected the auditor and negotiated the audit fees with varying degrees of involvement by the audit committee. Given managers focus on cost control, audit fees were subject to downward pressure. However, Section 301 of SOX states that the audit committee shall be directly responsible for the appointment, compensation, and oversight of the auditor. The incentives of audit committee members are quite different from those of management, particularly in the post-SOX period. Audit committee members can be expected to be more concerned about their reputation and making sure that the auditors did not miss anything in the audit; this in turn changes the dynamics of audit fee negotiations, and hence lowballing is less likely to occur in the postSOX period. Fourth, the failure of Arthur Andersen following its indictment by the U.S. Department of Justice in 2002 led to a more concentrated audit market. The U.S. General Accounting Ofces (2003) study on consolidation of public accounting rms provides evidence about the heightened concentration in many industries following the demise of Andersen. The increased concentration following Andersens demise also changes the dynamics of audit pricing, and has the potential to reduce the lowballing of audit fees. Fifth, the requirements related to Section 404 of SOX imposed signicant additional demands on manpower resources of audit rms. Both anecdotal evidence in the media and prior research suggest that there were substantial increases in audit fees in 2003 and 2004 (Gullapalli 2005; Raghunandan and Rama 2006). A signicant part of such higher audit fees is attributable to the substantially higher audit effort during 2004 in the context of implementing Section 404 of SOX (cf., Ernst & Young 2005; KPMG 2005). Section 404 thus presented the audit rms with a new mandated source of revenue, so there is less of an incentive for audit rms to cut back on audit fees for new clients. In addition, the requirements of SOX 404 could lead to signicantly more audit work for initial-year engagements; this in turn would result in disappearance of the initial-year fee discount and, possibly, an initial-year fee premium. Many news reports and prior research indicate that the large audit rms were much more likely to drop existing clients in the post-SOX period (Bryan-Low 2003; Byrnes 2003; Plitch and Wei 2004; Rama and Read 2006); if audit rms

For example, an executive from a smaller public accounting rm notes that his rm was shut out of marketing nonaudit services to publicly traded companies because the national accounting rms would lowball the audit with the goal of selling their pricier nonaudit services. Now that [after SOX] cross-selling is prohibited, the playing eld has leveled (Banham 2003). The leveling of the playing eld also suggests that the larger audit rms would no longer lowball audit fees in order to obtain the more lucrative nonaudit service contracts.

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

174

Huang, Raghunandan, and Rama

were actively dropping existing clients, then it is unlikely they would lowball audit fees in order to acquire new clients.3 In summary, there are multiple reasons to expect that there would not be lowballing of audit fees in the post-SOX period. We empirically test this conjecture by comparing audit fees for new clients in 2001 and 2006. The audit market witnessed unprecedented changes during the period from 2002 to 2004, including the enactment of SOX in 2002, the implementation of SOX by the SEC in 2003, and SOX Section 404s requirement for internal control reporting for scal years ending on or after November 15, 2004 (for accelerated lers). Hence, a valid investigation of fee cutting for initial-year audits requires that audit fee levels stabilize at the new (and higher) levels in the post-SOX period. Given the changes from 2002 to 2004, we use auditor changes during 2006 to examine audit fees in the post-SOX period.4 For the pre-SOX period, we can investigate only one yearnamely, 2001. This is because under FRR No. 56 (SEC 2000), SEC registrants were required to publicly disclose fee data in proxy statements led with the SEC on or after February 5, 2001. Further, while FRR No. 68 (SEC 2003) requires fee disclosure for two scal years, FRR No. 56 only required fee data for the latest scal year. Since we directly calculate changes in audit fees as a part of our analyses, we require fee data for two scal years: the rst year with the new auditor and the last year with the old auditor. Hence, we examine auditor changes during 2001 for the pre-SOX period. Prior research (Krishnan and Krishnan 1997; Raghunandan and Rama 1999; Shu 2000; Whisenant et al. 2003) shows that auditor resignations differ signicantly from client dismissals of auditors. Our sample includes very few instances of auditor resignations with available data in 2001; the sample-size problem becomes particularly acute when we partition based on the type of the predecessor and successor auditor. Consequently, in this paper we only examine auditor changes involving client dismissals.5 Prior research has consistently shown a Big 46 audit fee premium and quality differences using a variety of metrics (Simunic 2005). Hence, it is likely that fee changes following auditor changes will vary with the type of predecessor and successor auditors. Also, our sample includes very few instances of auditor changes involving a non-Big 4 predecessor and a Big 4 successor. Hence, in our analyses we separately examine auditor switches within the Big 4 and non-Big 4. Consistent with the approach used in prior studies, we measure the initial-year audit fee discount relative to continuing clients by including an indicator variable for initial-year audits in a multiple regression model that has the natural logarithm of audit fees as the dependent variable. We nd that in the Big 4 client sample, initial-year audit clients received

A reviewer notes that Danos and Eichenseher (1986) nd that supplier concentration is a result of client regulation and of audit rms seeking scale economies. Given the numerous changes in the post-SOX era, one might expect greater incentives to lowball given the added benets of scale to the Big 4 in the face of increased client regulation. Ultimately, whether the Big 4 continue to lowball in the post-SOX era is an empirical question, and this paper provides some relevant empirical evidence on this issue. We also investigate auditor changes in 2005 and, except in one instance as noted in footnote 15, obtain qualitatively similar results with the 2005 sample. Rama and Read (2006) show univariate results indicating that audit fees increased signicantly for clients with a resignation by a Big 4 predecessor in 2003, but not in 2001. Their sample sizes are only 21 and 54 for 2001 and 2003, respectively. Prior research related to a Big N fee premium has examined periods when there were the Big 8, Big 6 or Big 5 audit rms. For the sake of expositional convenience, we refer to the Big 4 even though the pre-SOX period examined in this study had the Big 5.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009

Audit Fees for Initial Audit Engagements Before and After SOX

175

a fee discount of about 24 percent in 2001; in contrast, initial-year audit clients paid a premium of about 16 percent in 2006. In the non-Big 4 client sample, we do not observe any signicant initial-year fee discount or premium in either 2001 or 2006. The above method leads to an indirect estimation of the audit fee discount in the initial year of an audit engagement. We also directly calculate the change in audit fee following an auditor change by comparing the fees paid before and after auditor changes, in the preand post-SOX periods. We nd that 62 (50) percent of the clients moving from one Big 4 (non-Big 4) auditor to another Big 4 (non-Big 4) auditor paid lower audit fees to the successor auditor than to the predecessor auditor; in 2006, only 38 (49) percent of clients switching within the Big 4 (non-Big 4) paid lower audit fees to the successor auditor. Our regression analyses with changes in audit fees as the dependent variable (with changes in the levels of other variables as the control variables) conrms the nding that clients moving from one Big 4 to another Big 4 auditor experienced a fee decline in 2001. Results from the non-Big 4 sample indicate that there is a signicant initial-year fee discount in 2001 and 2006. Overall, the results suggest that audit fee discounts for initial-year audit engagements are much less likely in the post-SOX period than in the pre-SOX period for Big 4 clients; in fact, we observe a signicant initial-year audit fee premium for Big 4 clients in 2006. In a recent study, Ghosh and Lustgarten (2006) nd that there was a Big 4 price discount for initial-year audit engagements in 2001 but not in 2003. Taken together, the results from the two studies suggest that the initial-year audit fee patterns for the Big 4 changed gradually from 2001 to 2006, with the discount disappearing in 20022003 and a premium appearing in 20052006. The results should be of interest to clients, auditors, and regulators, given the concerns expressed by regulators and legislators about the adverse consequences associated with initial-year audit fee discounts. A secondary nding of our study is that the Big 4 are less likely to serve as a successor auditor following an auditor change in 20052006 than in 2001. Overall, our ndings reinforce suggestions that the Big 4 rms have become more conservative in the post-SOX period. METHOD Table 1 shows our sample selection process. We begin with 5,418 and 7,626 observations that are in the Compustat database and have fee data available in the Audit Analytics database for scal years ending in 2001 and 2006, respectively. The auditing environment was in a signicant state of ux late in the year in both 2001 and 2004. For example, the Enron bankruptcy occurred in November 2001, and congressional hearings started almost immediately about the role of Enrons auditor (Andersen) in the failure of Enron; since it is likely that such legislative actions would have an impact on auditors actions, comparisons may be difcult between rms with scal year-ends in early 2001 and December 2001. Similarly, Section 404 of SOX became applicable for accelerated lers with scal year-ends on or after November 15, 2004, and auditors and others have noted that there was a steep learning curve associated with Section 404. Hence, it is not appropriate to compare rms that have a scal year-end after November 15, 2006 (2005) with rms that have a scal year-end earlier in 2006 (2005), since the former type rms would be in the third (second) year of their Section 404 audit while the latter would

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

176

Huang, Raghunandan, and Rama

TABLE 1 Sample Description Panel A: Sample Selection 2001 Compustat observations (rm-years) with fee data in AuditAnalytics Less: Fiscal year end other than December 31 Less: Missing fee data for prior year or audit fee 0 Less: SIC 6000 Less: Foreign rms Less: Variable data missing in Compustat Less: Audit Fee less than $25,000 Total Panel B: Types of Auditor Changes in 2001 and 2006 New Auditor Old Auditor B4 NB4 Auditor Changes in 2001 Client Auditor Dismissal Resignation B4 53 12 NB4 21 10 B4 3 0 NB4 3 1 Auditor Changes in 2006 Client Auditor Dismissal Resignation B4 39 7 NB4 50 57 B4 4 1 NB4 5 43 5,418
1,677 401 1,484 26 125 14

2006 7,626
2,747 48 2,104 430 282 23

1,691

1,992

Panel C: Auditor Dismissals (within Big 4 and non-Big 4) by Industry By Industry: Dened by SIC Code Mining and Construction (10001999, except 13001399) Food (20002111) Textiles and Printing / Publishing (22002799) Chemicals (28002824, 28402899) Pharmaceuticals (28302836) Extractive (13001399, 29002999) Durable manufacturers (30003999, except 35703579 and 36703679) Transportations (40004899) Utilities (49004999) Retail (50005999) Computers (35703579 and 36703679) Others (0000999) Total 2001 3 0 2 3 1 6 22 11 4 7 2 2 63 2006 3 2 0 1 11 13 26 12 8 12 7 1 96

Panel C considers only those dismissals that occurred from one Big 4 rm to another or from a non-Big 4 rm to another (i.e., we exclude observations across types, from a Big 4 to a non-Big 4 or vice versa). Only such dismissals are used in the rest of our analyses.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009

Audit Fees for Initial Audit Engagements Before and After SOX

177

be in the second (rst) year of their Section 404 audit.7 Consequently, we restrict the analysis to rms with a December 31 scal year-end.8 As part of our analyses, we calculate changes in audit fees (fees paid in the rst year with the new auditor less the fees paid in the last year with the predecessor auditor). Hence, to ensure that the sample size is uniform for all our analyses, we delete rms without fee data for the prior year. Since nancial and service rms have unique characteristics and since such rms are typically excluded in prior audit fee studies (e.g., Huang et al. 2007), we drop 1,484 and 2,104 observations related to rms with SIC codes higher than 6000 from 2001 and 2006, respectively. Since some of the SOX requirements were not applicable for foreign rms in 2005, we delete 26 and 430 observations related to foreign rms in 2001 and 2006, respectively. We then exclude 125 and 282 observations missing nancial data in 2001 and 2006, respectively. Finally, to ensure that results (especially those related to change analyses) are not driven by small-denominator-related issues, we delete 14 and 23 rms with audit fees less than $25,000 from the 2001 and 2006 samples, respectively.9 Thus, our sample includes 1,691 and 1,992 observations for 2001 and 2006, respectively. We expect audit fee changes following auditor changes to vary with the type of predecessor and successor auditor. In addition, prior research also shows that client-initiated dismissals and auditor-initiated resignations must be examined separately in studies of auditor changes (e.g., Krishnan and Krishnan 1997; Raghunandan and Rama 1999; Shu 2000; Whisenant et al. 2003). Thus, we rst partition the sample using the following variables: time period (pre- or post-SOX), type of change (dismissal or resignation), predecessor auditor (Big 4 or non-Big 4) and successor auditor (Big 4 or non-Big 4). Several interesting observations can be made related to the data in Panel B of Table 1. First, resignations are more likely in 2006 than in 2001; auditor resignations account for only seven out of 103 (7 percent) auditor changes in the 2001 sample, but account for 53 of 206 (26 percent) auditor changes in 20052006.10 Second, there are very few instances of a Big 4 rms serving as a successor following the resignation of a predecessor. Our sample includes only one instance of a Big 4 successor after an auditor resignation by a non-Big 4 rm. Third, the likelihood of a Big 4 successor following a client dismissal is lower in 20052006 than in 2001. The data show that a Big 4 auditor served as a successor following another Big 4 auditors dismissal in 53 of 74 instances (72 percent) in 2001; however, a
7

10

There are many nonaccelerated lers in our sample; however, it is likely that the work associated with SOX 404 for accelerated lers would have affected the manpower associated with all SEC audits. Note that even with this restriction, there is a bias against nding any reduction in initial-year fee discounting in 2001 if audit fees for clients with a December 31, 2001, scal year-end were higher than expected in the aftermath of last-minute changes in the audit effort due to Enrons failure in November 2001 and Andersens problems beginning January 2002. Conversely, to the extent there was a steep learning curve effect related to Section 404 audits, the fees for scal 2006 can be expected to be lower than the fees for scal 2005, resulting in a bias for nding signicant initial-year fee reductions. Nevertheless, such biases should affect both new and existing clients; this is one reason why we use a fee-levels regression that includes new and existing clients as well as analyses (descriptive and a change regression) based on audit fee changes. Also, as noted later, as part of our sensitivity tests we delete observations with an adverse internal control report, but the inferences are qualitatively similar with the reduced sample. As part of our sensitivity tests, we also eliminated all rms with audit fees with less than $100,000. Our results are substantively similar with this alternative cutoff. In FRR No. 68, the SEC (2003) changed the audit fee disclosure rules, requiring rms to disclose details about fees paid to the auditor in 10-K lings if the registrant did not le a proxy. Prior to FRR No. 68, the SEC only required fee disclosures in proxy statements, and many small registrants did not always le a proxy. The greater availability of fee data from smaller SEC registrants may partially explain the higher proportion of resignations in 2006 in our sample.

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

178

Huang, Raghunandan, and Rama

Big 4 auditor was the successor in only 39 of 89 instances (44 percent) of a clients dismissing a predecessor Big 4 auditor in 2006. Considering instances of a non-Big 4 predecessor being dismissed, a Big 4 rm served as the successor in 12 of 22 changes (55 percent) in 2001; in 2006, this proportion had dropped to 11 percent (seven of 64). This suggests that the Big 4 have become more selective in accepting new clients (or, that the non-Big 4 are much more aggressive in accepting new clients) in the post-SOX period than in prior periods; however, more detailed analysis (including consideration of client characteristics) is necessary before concluding that the Big 4 are more conservative in client selection in the post-SOX period. Since the data indicate that some of the resignation cells have very few observations, in our multiple regression analyses we focus only on client dismissals. Based on prior research (e.g., Simunic 1980; Francis and Wang 2005; Raghunandan and Rama 2006), we use the following regression model to examine the factors associated with initial-year discounting of audit fees following auditor dismissals: LnAF 1LnTA 2RECINV 3SQSEG 4FOREIGN 5LIQ
6DA 7ROA 8GC 9LOSS 10 MW 11RESTATE 12NAFRATIO 13INITIAL .

(1)

The variables are dened as follows: LnAF LnTA RECINV SQSEG FOREIGN LIQ DA ROA GC LOSS MW RESTATE NAFRATIO INITIAL

natural logarithm of audit fees; natural logarithm of total assets; percentage of total assets in receivables and inventories; square root of number of business segments reported on Compustat; 1 if foreign segments reported, else 0; current ratio; debt-to-assets ratio; return on assets; 1 if audit report is modied for going concern, else 0; 1 if there is a bottom-line loss, else 0; 1 if there is a material weakness in internal controls, else 0; 1 if there is a restatement in the current or prior year, else 0; ratio of nonaudit fees to audit fees; and 1 if initial-year audit, else 0.

The rst nine variables in the model above are fairly standard and follow wellestablished audit fee models. We include MW based on submissions to the SEC (2005) by each of the Big 4 auditors that fees would be signicantly higher for rms with internal control problems, as well as recent evidence in Raghunandan and Rama (2006) that audit fees are higher by about 43 percent for rms with adverse SOX 404 internal control reports. Similarly, we include RESTATE because it is likely that audit fees would be higher for rms that have had to recently restate their nancial statements.11 We include NAFRATIO because the recent limits imposed by the SEC on the provision of certain types of nonaudit
11

More generally, the three variables indicating special situationsGC, MW and RESTATEalso account for the fact that in bad cases, the new auditor may charge a premium to be persuaded to take the client.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009

Audit Fees for Initial Audit Engagements Before and After SOX

179

services after SOX may change the pricing of audit services. Finally, INITIAL is our variable of interest. We also directly calculate the change in audit fees for each rm. The fee-change measure is the difference in audit fees between the 2001 (2006) and 2000 (2005) scal years. We then use the following changes regression in addition to the levels regression noted above: DLnAF 1DLnTA 2DRECINV 3DSQSEG 4DFOREIGN
5DLIQ 6DDA 7DROA 8DGC 9 DLOSS 10 DMW 11DRESTATE 12DNAFRATIO 13DINITIAL .

(2)

The variables that begin with D measure the difference in values of the variables between the current year (2001 or 2006) and the preceding year (2000 or 2005). We obtain data about auditor changes, audit and nonaudit fees, internal control opinions, and restatements from the Audit Analytics database. All other data are obtained from the Compustat database. We winsorize continuous variables at the 1st and 99th percentiles; this is done to reduce the inuence of extreme observations.12 RESULTS Table 2 provides descriptive data about the 2001 and 2006 auditor change samples. A noticeable difference between the pre- and post-SOX periods is that the mean and median audit fees for 2006 are much higher than the corresponding numbers for 2001. The differences can be attributed to a variety of reasons, including (1) the higher levels of audit effort and risk premium in the post-SOX period, (2) additional cost related to Section 404 audit work, and (3) the changes in the denition of audit fees by the SEC (2003).13 Not surprisingly, given the nonaudit-related changes following SOX, the NAFRATIO is much lower in 2006 than in 2001. The data also indicate that restatements are more prevalent in the 2006 sample than in the 2001 sample; this is a reection of the well-documented increase in the number of restatements found in the general population in the post-SOX period (e.g., FEI 2005). Table 3 presents the results from the fee-levels regression discussed earlier. Given the well-documented differences between Big 4 and non-Big 4 auditors (Simunic 2005), we perform the regressions separately for Big 4 and non-Big 4 auditors. The Big 4 (non-Big 4) samples include only those clients that either continued with a Big 4 (non-Big 4) auditor or switched from one Big 4 (non-Big 4) auditor to another Big 4 (non-Big 4) auditor. The Big 4 regressions have higher explanatory power than the non-Big 4 regressions in both 2001 and 2006. This can perhaps be attributed to the fact that the Big 4 audit both large and small clients, while the size range of clients audited by the non-Big 4 is smaller; this in turn results in lower variation in the audit fees for the non-Big 4 sample, in turn yielding lower explanatory power for the regression.
12

13

While we do not present a correlation matrix, none of the VIF scores exceeds 2.0, suggesting that multicollinearity is not a problem. As part of our sensitivity analyses, we also winsorized DA and ROA so that the maximum absolute value is 1.0; the results with this approach remain quite similar to the results presented in this paper. The SEC (2003) moved some types of fees from the audit-related services fees category to the audit fees category. The differences in denition suggest that the 2001 and 2006 audit fees cannot be directly compared; however, we are interested not in the direct comparisons between 2001 and 2006 audit fees but rather in the differences in fees between the old and new auditor in the respective regimes then in place in 2001 and 2006.

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

Auditing: A Journal of Practice & Theory American Accounting Association May 2009

180

TABLE 2 Descriptive Statistics Panel A: 2001 SampleContinuing Clients (n 1,588) TA Mean 2380.54 Std. Dev. 6345.34 25th 57.33 percentile Median 246.20 75th 1230.93 percentile AF-New AF-Old RECINV SQSEG FOREIGN LIQ 0.62 1.34 0.11 0.22 0.53 0.58 1.64 0.10 0.19 0.48 0.25 0.20 0.08 0.21 0.36 1.36 0.48 1.00 1.00 1.73 0.50 0.50 0.00 0.00 1.00 DA ROA GC LOSS MW RESTATE NAFRATIO 0.49 0.50 0.00 0.00 1.00 0.10 0.30 0.00 0.00 0.00 0.03 0.17 0.00 0.00 0.00 1.39 1.88 0.39 0.84 1.71 3.18 0.52 0.14 0.07 3.52 0.31 0.40 0.26 1.19 0.28 0.16 0.00 1.93 0.53 3.68 0.69 0.00 0.00 0.05 0.00

Panel B: 2001 SampleDismissal Clients (n 63) TA Mean 1972.15 Std. Dev. 5441.00 25th 26.20 percentile Median 155.50 75th 915.60 percentile AF-new 0.47 1.36 0.09 0.18 0.29 AF-old 0.48 1.44 0.09 0.19 0.33 RECINV SQSEG FOREIGN LIQ 0.28 0.22 0.07 0.23 0.46 1.32 0.44 1.00 1.00 1.73 0.46 0.50 0.00 0.00 1.00 DA ROA GC LOSS MW RESTATE NAFRATIO 0.51 0.50 0.00 1.00 1.00 0.06 0.25 0.00 0.00 0.00 0.14 0.35 0.00 0.00 0.00 1.08 2.01 0.05 0.41 1.21 Huang, Raghunandan, and Rama 2.30 0.62 0.25 0.08 2.94 0.50 0.60 0.27 0.99 0.33 0.43 0.00 1.39 0.46 2.48 0.73 0.00 0.00 0.04 0.00

Panel C: 2006 SampleContinuing Clients (n 1,786) TA Mean 3167.75 Std. Dev. 7387.18 25th 72.00 percentile Median 437.40 75th 2091.13 percentile AF-new 1.98 3.37 0.34 0.88 2.08 AF-old 1.87 3.30 0.31 0.76 1.98 RECINV SQSEG FOREIGN LIQ 0.23 0.19 0.07 0.18 0.34 1.27 0.39 1.00 1.00 1.41 0.45 0.50 0.00 0.00 1.00 DA ROA GC LOSS MW RESTATE NAFRATIO 0.35 0.48 0.00 0.00 1.00 0.09 0.51 0.00 0.00 0.00 .11 .31 .00 .00 .00 .21 .38 .04 .12 .26 3.07 0.58 0.12 0.06 3.15 0.55 0.55 0.25 1.26 0.30 0.07 0.00 2.00 0.52 3.52 0.70 0.03 0.00 0.08 0.00

(continued on next page)

Auditing: A Journal of Practice & Theory May 2009 American Accounting Association

Audit Fees for Initial Audit Engagements Before and After SOX

TABLE 2 (continued) Panel D: 2006 SampleDismissal Clients (n 96) TA Mean 1527.47 Std. Dev. 4347.46 25th 11.45 percentile Median 104.65 75th 853.18 percentile AF-new 1.19 2.33 0.11 0.37 1.25 AF-old 1.27 2.67 0.11 0.41 1.15 RECINV SQSEG FOREIGN LIQ 0.24 0.23 0.05 0.17 0.40 1.20 0.37 1.00 1.00 1.41 0.31 0.47 0.00 0.00 1.00 DA ROA GC LOSS MW RESTATE NAFRATIO 0.53 0.50 0.00 1.00 1.00 0.01 0.10 0.00 0.00 0.00 .33 .47 .00 .00 1.00 .20 .29 .00 .07 .33 3.12 0.83 0.46 0.26 4.22 1.02 1.07 0.44 0.82 0.33 0.46 0.00 1.54 0.59 0.02 0.00 3.24 0.91 0.05 1.00

This table presents descriptive statistics for the 2001 and 2006 samples examined in this study. Variable Denitions: TA total assets at year-end; AF-new audit fees paid for scal 2001 or 2006, as appropriate; AF-old audit fees paid for scal 2000 or 2005, as appropriate; RECINV percentage of total assets in receivables and inventories; SQSEG square-root of number of business segments reported on Compustat; FOREIGN 1 if foreign segments reported, else 0; LIQ current ratio; DA debt-to-asset ratio; ROA return-on-assets; GC 1 if audit report is modied for going concern, else 0; LOSS 1 if net income is negative, else 0; MW 1 if there is a material weakness in internal controls, else 0; RESTATE 1 if there is a restatement in the current or prior year, else 0; and NAFRATIO ratio of nonaudit fees to audit fees.

181

Auditing: A Journal of Practice & Theory American Accounting Association May 2009

182

TABLE 3 Audit Fee Regression Results Big 4 Clients 2001 Variable Intercept LnTA RECINV SQSEG FOREIGN LIQ DA ROA GC LOSS MW NAFRATIO RESTATE INITIAL Coeff. 2.485 .481 .901 .166 .342 .018 .091 .366 .247 .039 .033 .175 .268 p-value
.01 .01 .01 .01 .01 .01

Non-Big 4 Clients 2006 2001 p-value

.01 .01 .01 .01 .01

2006 p-value
.01 .01 .01

Coeff. 3.537 .477 .895 .248 .380 .005 .026 .391 .316 .155 .213 .215 .100 .149

Coeff. 3.770 .418 .491 .036 .307 .011 .050 .189 .294 .150 .091 .324 .005

Coeff. 3.273 .490 .228 .169 .211 .007 .009 .094 .278 .334 .507 .740 .050 .075

p-value
.01 .01

.11 .01 .01 .24 .01 .02 .01 N 1,472; F stat. 460.4; p .001; Adj. R2 .789.

.52 .70 .01 .01 .01 .01 .01 .07 .10 N 1,367; F stat. 283.1; p .001; Adj. R2 .729.

.69 .01 .43 .72 .02 .02 .07 .10 .05 .97 N 179; F stat. 26.9; p .001; Adj. R2 .636.

.06 .07 .01 .21 .48 .01 .01 .01 .01 .01 .43 .37 N 515; F stat. 82.8; p .001; Adj. R2 .674.

Huang, Raghunandan, and Rama

(continued on next page)

Auditing: A Journal of Practice & Theory May 2009 American Accounting Association

Audit Fees for Initial Audit Engagements Before and After SOX

TABLE 3 (continued)
This table presents the results from regressions with the natural logarithm of audit fees as the dependent variable. All p-values are two-tailed. The 2001 and 2006 samples include rms that either continued with a Big 4 (non-Big 4) auditor or dismissed the incumbent Big 4 (non-Big 4) auditor and engaged a different Big 4 (non-Big 4) auditor, respectively. Variable Denitions: LnTA natural logarithm of total assets; RECINV percentage of total assets in receivables and inventories; SQSEG square-root of number of business segments reported on Compustat; FOREIGN 1 if foreign segments reported, else 0; LIQ current ratio; DA debt-to-asset ratio; ROA return-on-assets; GC 1 if audit report is modied for going concern, else 0; LOSS 1 net income is negative, else 0; MW 1 if there is a material weakness in internal controls, else 0; RESTATE 1 if there is a restatement in the current or prior year, else 0; NAFRATIO ratio of nonaudit fees to audit fees; INITIAL 1 if new audit client, else 0.

183

184

Huang, Raghunandan, and Rama

The coefcients on the control variables are generally signicant with the expected signs. Considering the variable of interest, INITIAL, in the Big 4 sample, it is negative and signicant in the 2001 regression. The magnitude of the coefcient, 0.268, indicates that the initial-year audit fee discount is about 24 percent. In contrast, the coefcient of INITIAL is positive and signicant in the 2006 regression; the magnitude of the coefcient, 0.149, indicates that the initial-year clients pay a premium of around 16 percent in 2006. However, in the two non-Big 4 regressions, INITIAL is not signicant in either regression. The results reinforce the view that fee changes for initial-year audits need to be examined separately for Big 4 and non-Big 4 auditors. Fee ChangesDirect Calculation Table 4 provides data about the changes in audit fees following auditor dismissals, based on various partitions of the predecessor and successor auditor. First, the median change in audit fees is negative for all four predecessor-successor combinations in 2001; however, the mean values are positive in two of the cells.14 Overall, 62 of the 96 (65 percent) clients experienced a fee decline in 2001 following the dismissal of the predecessor. Second, the median is negative for only one of the four cells in 20052006changes involving a Big 4 predecessor and a non-Big 4 successor; the mean change in fee percent is positive for all cells. Overall, 76 of the 153 (47 percent) clients experienced a fee decline in 20052006 following the dismissal of the predecessor. Considering the proportion of clients with a fee reduction, a Chi-square test rejects the null hypothesis of no difference between the two periods (p .05). Table 5 provides the results from the changes regressions (model 2); the regressions are similar to those presented in Table 3, except that the dependent variable measures the change in audit fees, while the control variables are changes in the respective variables. In general, fee-change regressions have much lower explanatory power compared with feelevels regressions (Francis and Wang 2005; Ferguson et al. 2006). Each of the four regressions in Table 5 is signicant, although the explanatory powers are much lower than the corresponding regressions in Table 3. Considering the variable of interest, INITIAL, there is a signicant initial-year audit fee discount in 2001 for Big 4 clients. However, INITIAL is positive but not signicant in the 2006 regression.15 In the non-Big 4 regressions, INITIAL is negative and signicant in both years; this result differs from the inference based on the levels regression in Table 3 but is consistent with the Big 4 results and with the univariate results shown in Table 4. Additional Analyses Industry Effects Panel C of Table 1 indicates that there are differences in the occurrences of auditor dismissals in some industries in 2006 when compared with 2001. To ensure that the results are not being driven by rms in any particular industry, we perform the following analyses: We create 13 different subsamples by deleting rms in each of the 13 industries. We then perform our fee levels and fee change regressions on these 13 subsamples. We nd that in
14

15

We winsorize audit-fee-change percentages at 300 percent and 75 percent (to reect changes in feesup and downby a factor of 3). The INITIAL variable is positive and signicant in the regression with 2005 data. We conjecture that the higher initial-year premium for 2005, when compared with 2006, arises because 2005 represents only the second year of SOX 404, and hence the fee levels had not yet stabilized in the post-SOX period. If the learning curve related to SOX 404 was incomplete in 2005, we can expect that initial-year audits would entail greater audit effort and hence result in an initial-year premium.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009

Auditing: A Journal of Practice & Theory Old Auditor Big 4 Non-Big 4 New Auditor Big 4 Non-Big 4 Big 4 Non-Big 4 May 2009 American Accounting Association

Audit Fees for Initial Audit Engagements Before and After SOX

TABLE 4 Descriptive Data about Changes in Audit Fees following Auditor Dismissals 2001 Mean (Median) Change in Fee % 3.0 (9.0) 17.1 (24.0) 31.8 (9.0) 4.0 (4.0) 2006 Mean (Median) Change in Fee % 15.9 (2.0) 2.5 (4.0) 121.4 (4.7) 19.2 (0.0)

Number of Clients 53 21 12 10

Proportion with Fee Reduction 62% (33 / 53) 76% (16 / 21) 67% (8/ 12) 50% (5/ 10)

Number of Clients 39 50 7 57

Proportion with Fee Reduction 38% (15 / 39) 62% (31 / 50) 29% (2/ 7) 49% (28 / 57)

This table presents data about the changes in audit fees (measured as difference between fees paid in the rst year with the successor auditor and the last year with the predecessor auditor) following client dismissals of the incumbent auditor in 2001 and 2006.

185

Auditing: A Journal of Practice & Theory American Accounting Association May 2009

186

TABLE 5 Audit Fee Change Regression Results Big 4 Clients 2001 Variable Intercept DLnTA DRECINV DSQSEG DFOREIGN DLIQ DDA DROA DGC DLOSS DMW DNAFRATIO DRESTATE INITIAL Coeff. .099 .258 .073 .129 .036 .006 .096 .137 .069 .021 .005 .040 .196 p-value
.01 .01

Non-Big 4 Clients 2006 2001 p-value

.01 .01

2006 p-value Coeff. .091 .280 .248 .325 .084 .003 .014 .016 .098 .019 .123 .002 .056 .172 p-value
.01 .01

Coeff. .052 .507 .435 .153 .060 .006 .038 .135 .096 .024 .099 .012 .040 .040

Coeff. .016 .049 1.177 .100 .137 .003 .211 .054 .251 .032 .009 .007 .279

.55
.01

.25 .07 .09 .01 .02 .19 .11 .35 .01 n 1,472; F stat. 13.3; p .001; Adj. R2 .091.

.05 .16 .35 .38 .63 .09 .16 .40 .01 .68 .23 .52 n 1,367; F stat. 17.9; p .001; Adj. R2 .138.

.57 .64 .01 .46 .19 .82 .17 .56 .04 .59 .78 .95 .02 n 179; F stat. 2.3; p .009; Adj. R2 .082.

.20 .02 .42 .51 .13 .26 .16 .69 .09 .94 .26 .01 n 515; F stat. 5.6; p .001; Adj. R2 .104.

Huang, Raghunandan, and Rama

This table presents the results from regressions with changes in the natural logarithm of audit fees as the dependent variable. All p-values are two-tailed. The 2001 and 2006 samples include rms that either continued with a Big 4 (non-Big 4) auditor or dismissed the incumbent Big 4 (non-Big 4) auditor and engaged a different Big 4 (non-Big 4) auditor, respectively. The variables that begin with D measure the difference in values of the variables between the current year and the preceding year; the variables themselves are dened as in Table 3.

Audit Fees for Initial Audit Engagements Before and After SOX

187

every subsample, the basic inferences hold; namely, Big 4 rms offered a signicant price discount for new clients in 2001 but not in 2006. Matched-Pair Approach We also perform a matched-pair test to ensure that the results are not being driven by any industry clustering effects. Since we have only 10 intra-non-Big 4 dismissals in 2001, we do not examine the non-Big 4 sample for 2001. We match each auditor dismissal observation with a matched pair from the same year, industry, and size. We obtained matches for 41 (68) of the 53 (96) auditor dismissals in 2001 and 2006, respectively, on the basis of four-digit SIC code; for an additional four (seven) and six (17) observations, we were able to match on the basis of three- and two-digit SIC codes, respectively; the other two (four) were matched on the basis of one-digit SIC code. We matched on the basis of total assets and took the control observation with the nearest size that had all available data. In the levels regressions with the Big 4 group, the coefcients of INITIAL in such matched-pair approach are 0.281 and 0.188 in 2001 and 2006, respectively; both values are signicant (p .10). In contrast, for the non-Big 4 group, the coefcient of INITIAL is 0.001 in 2006 and is not signicant at conventional levels. In the changes regressions with the Big 4 group, the coefcients of INITIAL are 0.200 in 2001 (p .10) and 0.064 (p .47) in 2006, respectively. For the non-Big 4 group, the coefcient of INITIAL is 0.190 (p .10) in 2006. In summary, results from the matched-pair approach reinforce the ndings from the main results presented earlier. Internal Control Quality Our 2006 sample includes some rms that had an adverse internal control report for 2005. If a rm that changed auditors in 2006 had an adverse internal control report in 2005, then it is likely that the audit fee would have been higher for scal 2005so there may be a bias in favor of nding a fee reduction for scal 2006, particularly if the rm had corrected the internal control problem early in 2006. Conversely, if a rm had an adverse internal control report for scal 2006 but a clean internal control report for scal 2005, then there is a bias against nding a fee reduction in 2006. Hence, we delete rms that had an adverse internal control report and run the 2006 regressions. Our results with such reduced samples are substantively similar to those reported in Tables 3 and 5. We have data about internal control quality only for the 2006 sample (after SOX 404 became effective); we do not have internal control data for 2001.16 Assuming that internal controls did not suddenly deteriorate, we coded MW as 1 for clients that had a material internal control weakness in 2004, and reperformed the regressions for 2001. With this alternative approach, we nd that our primary inferences remain similar; the coefcient of INITIAL is negative and signicant in both the levels and changes regressions for Big 4 clients in 2001. Fiscal Year-End In our analyses, we examine only rms with a December 31 scal year-end. We perform sensitivity analyses as follows. Since SOX 404 was applicable for scal year-ends beginning
16

Firms changing auditors are required to indicate if there was a reportable event in the two years prior to the auditor change, and reliability of internal controls (as assessed by the auditor) is one of the items to be disclosed in the 8-K. However, prior to the implementation of SOX, such data can be obtained only for companies changing auditors. Note also that Section 302 of SOX, which requires disclosures about disclosure controls, became applicable only in August 2002 and hence is not applicable for our 2001 sample.

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

188

Huang, Raghunandan, and Rama

in November 15, 2004 and since Enron entered bankruptcy in November 2001, we include all rms with scal year-ends between November 15 and December 31. Results with such expanded samples are substantively similar to those reported in the paper. SUMMARY AND CONCLUSIONS Legislators, regulators, and the media have expressed concerns about auditors discounting initial-year audit fees following an auditor change because of suggestions that such discounting can have an adverse effect on audit quality. Many prior studies have documented the existence of an initial-year audit fee discount in the pre-SOX period. However, for a variety of reasons (changes to auditors business models and increased conservatism of Big 4 auditors in the post-SOX period, SOX stripping managements ability to hire and negotiate the audit fee, changes in the audit market following Andersens failure, and resource constraints related to the new SOX 404 requirements) it is likely that initialyear audit fee discounts would be less likely in the post-SOX period than in prior years. In this paper, we examine audit fees for clients changing auditors in 2001 and 2006. We nd that there is a signicant initial-year audit fee discount in 2001 for clients of the Big 4 audit rms: The new clients pay, on average, about 24 percent less than continuing clients after controlling for factors expected to be associated with audit fees. In contrast, there is a signicant premium for new Big 4 clients in 2006: Initial-year clients pay, on average, a premium of 16 percent more than continuing clients. Results from a changes model (with changes in audit fees as the dependent variable and changes in the levels of the control variables as the independent variables) conrm the ndings that new Big 4 clients had price discounts in 2001 but not in 2006. Thus the results suggest that concerns about the initial-year discounting of audit fees are not supported by empirical evidence in the post-SOX period, at least for the Big 4 auditors. The results related to non-Big 4 clients are not consistent, with the changesbut not levelsregressions indicating initial-year audit fee discounts in 2001 and 2006. Ghosh and Lustgarten (2006) examine audit fees during the period from 2000 to 2003 and show that there was signicant price discounting for initial audits by the non-Big 4 each year during 20012003. Overall, our results are consistent with the inference by Ghosh and Lustgarten (2006) that competition is more intense in the non-Big 4 segment of the audit market in the post-SOX period. The differential results for the Big 4 and non-Big 4 clients found in our study further reinforce the need to separately examine Big 4 and nonBig 4 clients in audit fee research in particular and auditing research in general. Our ndings also indicate that the Big 4 are much less likely to serve as a successor following a client dismissal of the predecessor in 2005 than in 2001. The lower likelihood of serving as a successor, coupled with the presence of an initial-year fee premium (as opposed to the initial-year fee discount that is observed in the pre-SOX period), supports suggestions that the Big 4 have become more conservative with respect to their new client acceptance and pricing decisions in the post-SOX period.

REFERENCES
Banham, R. 2003. Period of adjustment. Journal of Accountancy (February): 4349. Brown, K. 2002. Auditors methods make it hard to catch fraud by executives. Wall Street Journal (July 8): C1. Bryan-Low, C. 2003. Accounting rms aim to dispel cloud of corporate fraud. Wall Street Journal (May 27): C1. Byrnes, N. 2003. Reform: Whos making the grade. Business Week (September 22): 86. Auditing: A Journal of Practice & Theory American Accounting Association May 2009

Audit Fees for Initial Audit Engagements Before and After SOX

189

Craswell, A., and J. Francis. 1999. Pricing of initial audit engagements. The Accounting Review (April): 201216. Danos, P., and J. Eichenseher. 1986. Long-term trends toward seller concentration in the U.S. audit market. The Accounting Review (October): 633650. DeAngelo, L. 1981. Auditor independence, low balling, and disclosure regulation. Journal of Accounting and Economics (August): 113127. Ernst & Young. 2005. CommentsSecurities and Exchange Commission Roundtable on Implementation of Internal Control Reporting Provisions. Washington, D.C.: SEC. Ettredge, M., and R. Greenberg. 1990. Determinants of fee cutting on initial audit engagements. Journal of Accounting Research (Spring): 198210. Ferguson, A., C. Lennox, and S. Taylor. 2006. Audit fee rigidities in the presence of market frictions: Evidence and explanations. Paper presented at the Midyear Meeting of the Auditing Section of the American Accounting Association. Financial Executives Institute (FEI). 2005. Comments of the Committee on Corporate Reporting submitted to the Securities and Exchange Commission Roundtable on Implementation of Internal Control Reporting Provisions. Washington, D.C.: SEC. Flanigan, J. 2002. Andersens pain will strengthen system. Los Angeles Times (March 24): C1. Francis, J., and D. Wang. 2005. Impact of the SECs public fee disclosure requirement on subsequent period fees and implications for market efciency. Auditing: A Journal of Practice & Theory (Supplement): 145160. Geiger, M., and K. Raghunandan. 2002. Auditor tenure and audit reporting. Auditing: A Journal of Practice & Theory (March): 6778. General Accounting Ofce (GAO). 2003. Public Accounting Firms: Mandated Study on Consolidation and Competition (GAO-03-864). Washington, D.C.: GAO. Ghosh, A., and S. Lustgarten. 2006. Pricing of initial audit engagements by large and small audit rms. Contemporary Accounting Research (Summer): 333368. Glater, J. 2002. Audit rms await fallout and windfall. The New York Times (March 14): C1. Gullapalli, D. 2005. Audit fees are on rise as companies pony up. Wall Street Journal (March 25): C3. Healy, P. 2005. The challenges facing auditors and analysts in U.S. capital markets. The Saxe Lecture in Accounting. Delivered at Baruch College, New York, NY, April 4. Available at: http: / / newman.baruch.cuny.edu / DIGITAL / saxe / saxe 2005 / healy 05.html. Hirsch, J. 2002. Enron audit fee raises some brows. Los Angeles Times (January 23): A1. Huang, H., L. Liu, K. Raghunandan, and D. Rama. 2007. Auditor industry specialization, client bargaining power, and audit fees. Auditing: A Journal of Practice & Theory (May): 147158. KPMG. 2005. CommentsRoundtable on Implementation of Internal Control Reporting Provisions. Washington, D.C.: SEC. Krantz, M. 2002. With Andersen out, fees may rise. USA Today (June 20): C1. Krishnan, J., and J. Krishnan. 1997. Litigation risk and auditor resignations. The Accounting Review (October): 539560. Levin, C. 2002. Stock Options Amendment. Congressional Record 107th Congress Second Session. (July 10). Washington, D.C.: U.S. Senate. Plitch, P., and L. Wei. 2004. Auditor-client breakups rise, while disclosure often lags. Wall Street Journal (August 3): C3. Raghunandan, K., and D. Rama. 1999. Auditor resignations and the market for audit services. Auditing: A Journal of Practice & Theory (Spring): 124134. , and . 2006. SOX Section 404 material weakness disclosures and audit fees. Auditing: A Journal of Practice & Theory (May): 99114. Rama, D., and W. Read. 2006. Resignations by the Big 4 and the market for audit services. Accounting Horizons (June): 97109. Sankaraguruswamy, S., and S. Whisenant. 2005. Pricing initial audit engagements: Empirical evidence following public disclosure of audit fees. Working paper, National University of Singapore.

Auditing: A Journal of Practice & Theory

May 2009 American Accounting Association

190

Huang, Raghunandan, and Rama

Securities and Exchange Commission (SEC). 2000. Revision of the Commissions Auditor Independence Requirements. Financial Reporting Release No. 56. Washington, D.C.: SEC. . 2003. Strengthening the Commissions Requirements Regarding Auditor Independence. Financial Reporting Release No. 68. Washington, D.C.: SEC. . 2005. List of Participants and Comments for the SEC Roundtable on Implementation of Internal Control Reporting Provisions. Washington, D.C.: SEC. Shu, S. 2000. Auditor resignations: Clientele effects and legal liability. Journal of Accounting and Economics 29 (April): 173206. Simon, D., and J. Francis. 1988. The effects of auditor change on audit fees: Tests of price cutting and price recovery. The Accounting Review (April): 255269. Simunic, D. 1980. The pricing of audit services: Theory and evidence. Journal of Accounting Research 18 (1): 161190. . 2005. Comments delivered at a panel session of Midyear Meeting of the Auditing Section of the American Accounting Association, New Orleans, LA. Staw, B. 1976. Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance 16: 2744. , and J. Ross. 1987. Behavior in escalation situations: Antecedents, prototypes, and solutions. Research in Organizational Behavior 9: 3978. Turner, L. 2002a. Oversight Hearing on Accounting and Investor Protection Issues Raised by Enron and Other Public Companies. U.S. Senate, Committee on Banking, Housing and Urban Affairs. (February 26). Washington, D.C.: Government Printing Ofce. . 2002b. Hearings on H.R. 3763The Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002. U.S. House of Representatives, Committee on Financial Services. (March 13, 20; April 9). Washington, D.C.: Government Printing Ofce. U.S. House of Representatives. 2002. The Sarbanes-Oxley Act of 2002. Public Law 107-204 [H. R. 3763]. Washington, D.C.: Government Printing Ofce. U.S. Senate, Committee on Governmental Affairs, Subcommittee on Reports, Accounting and Management. 1977. Improving the Accountability of Publicly Owned Corporations and Their Auditors. Washington, D.C.: Government Printing Ofce. U.S. Senate. 2002. Hearings on accounting reform and investor protection. Committee on Banking, Housing, and Urban Affairs. S.107-948. (February 12, 14, 26, 27). Washington, D.C.: Government Printing Ofce. Whisenant, S., S. Sankaraguruswamy, and K. Raghunandan. 2003. Market reactions to disclosures of reportable events. Auditing: A Journal of Practice & Theory (March): 181194. Williams, P. 2007. Accounting: Playing lowball. Accountancy Age (July 12). Available at http: / / www.accountancyage.com / articles / print / 2193827.

Auditing: A Journal of Practice & Theory American Accounting Association

May 2009