The Effects of Auditor Characteristics on Audit Quality Before and After the Enforcement of Sarbanes-Oxley Act

This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., an auditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. We use the level of discretionary accruals and audit fees as a output-based and input-based proxy for audit quality, respectively. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. We then find that the magnitude of discretionary accruals decreased in the post-SOX period for the clients of local auditors and new auditors but not for the clients of Big 4 auditors, industry specialist auditors, and large office size auditors. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. We also highlight that increased audit fee premiums for some types of auditors do not accompany corresponding improvements in the quality of discretionary accruals by employing both audit fees and discretionary accruals as proxies for audit quality. Overall, our study shows that the effect of SOX on audit quality is not homogeneous across different types of auditors and two proxies for audit quality.