Auditor independence revisited: The effects of SOX on auditor independence

Following a wave of accounting scandals, the Sarbanes Oxley Act (SOX) was enacted on 30th July, 2002. The objective of the Act was to provide investors with better protection by establishing a new oversight board, improving corporate governance and internal controls, enhancing financial disclosure, and strengthening auditor independence. In this paper, we question the extent to which SOX actually improved auditor independence. We seek to shed some light on auditor independence-related issues by asking: What has the academy learned about SOX's impact on auditor independence in the five years since its enactment? Have researchers even examined key ramifications of SOX's requirements? If not, what areas need scrutiny? These are the issues considered here. In essence, we examine whether there is a gap between what regulators want to see addressed and what researchers have actually looked at with regard to auditor independence in the post-Sarbanes-Oxley period. The Securities and Exchange Commission (SEC) requirement to enhance auditor independence has been far reaching. It involves providing guidelines on matters relating to the provision of nonaudit services, partner rotation, audit engagement teams, auditor compensation and the role of the audit committees. Therefore, we expected to find a large number of academic research papers on this topic. Surprisingly, the number of such papers is very small, with the results inconclusive. Overall, the academy falls short of providing detailed guidance to the SEC and other regulators on the effectiveness of their guidelines in enhancing auditors' independence. We hope that, after reading our paper, regulators and academicians will agree with us that much more research is needed before assessing the impact of SOX. A recent FEI survey shows that 78 per cent of financial executives agree that the cost of implementing SOX exceed its benefits. We hope financial executives, whether they hold this view or not, may also find an interest in reading our paper. Given strong trends toward globalisation of business and the concomitant easing of cross-border stock exchange listing requirements, we also suggest to regulators that insights into the structure of US auditing may be gleaned by examining apparently successful auditing innovations overseas.