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Regulatory Spillovers in Common Audit Markets

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  • Duguay, Raphael
  • Minnis, Michael
  • Sutherland, Andrew

Abstract

We find that Sarbanes-Oxley (SOX) had two significant effects on the audit market for nonpublic entities. The first short-run effect stems from inelastic labor supply coupled with an audit demand shock from public companies. As a result, private companies reduced their use of attested financial reports in bank financing by 12%, and audit fee increases for nonprofit organizations (NPOs) more than doubled. The second long-run effect was a transformation in the audit supply structure. After SOX, NPOs were less likely to match with auditors most exposed to public companies, while auditors increasingly specialized their offices based on client type. Audit market concentration for NPOs dropped by more than half within five years of SOX and remained at this level through the end of our sample in 2013, while the number of suppliers increased by 26%. Our results demonstrate how regulation directed at public companies generates economically im-portant spillovers for nonpublic entities.

Suggested Citation

  • Duguay, Raphael & Minnis, Michael & Sutherland, Andrew, 2019. "Regulatory Spillovers in Common Audit Markets," MPRA Paper 93669, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93669
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    3. Abidoye Adenike & Awolowo Ifedapo Francis & Chan Dora, 2023. "Bridging the Gap: Integrating Forensic Accounting Skillsets for Enhanced Audit Quality in the Post-Pandemic Era," Journal of Forensic Accounting Profession, Sciendo, vol. 3(2), pages 63-81, December.
    4. Stefano Cascino & Ane Tamayo & Felix Vetter, 2021. "Labor Market Effects of Spatial Licensing Requirements: Evidence from CPA Mobility," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 111-161, March.
    5. Henry L. Friedman & Lucas Mahieux, 2021. "How Is the Audit Market Affected by Characteristics of the Nonaudit Services Market?," Journal of Accounting Research, Wiley Blackwell, vol. 59(3), pages 959-1020, June.
    6. Breuer, Matthias & Le, Anthony & Vetter, Felix, 2023. "Audit mandates, audit firms, and auditors," Working Papers 333, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    7. Raphael Duguay, 2022. "The Economic Consequences of Financial Audit Regulation in the Charitable Sector," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1463-1498, September.
    8. Sutherland, Andrew G., 2020. "Technology is changing lending: Implications for research," Journal of Accounting and Economics, Elsevier, vol. 70(2).

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    More about this item

    Keywords

    Sarbanes-Oxley; securities regulation; auditing; market structure; accounting; private firms; non-profits; labor economics.;
    All these keywords.

    JEL classification:

    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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