The Effect of Sarbanes-Oxley on Auditors

Journal of Finance and Accountancy

The Effect of the Sarbanes-Oxley Act on Auditors’ Audit

Performance

Tae G. Ryu

Metropolitan State College of Denver

Barbara Uliss

Metropolitan State College of Denver

Chul-Young Roh

East Tennessee State University

ABSTRACT

The issue of audit reporting for financially distressed firms continues to be of interest to the

public and to legislators. Previous studies have consistently shown that auditors fail to issue

going-concern opinions to more than half of bankrupt firms one year prior to bankruptcy.

The Enron and Arthur Andersen failures in late 2001 and early 2002, respectively, led to

the enactment of the Sarbanes-Oxley Act (SOX) in July 2002. Audit firms now claim that they

have become much more conservative with respect to client retention and acceptance decisions

because the risks associated with auditing increased significantly after the enactment of the SOX.

The primary purpose of this study is to provide a basis for a proper evaluation of auditors’

performance. We conducted performance comparisons between the pre- and post-SOX periods.

Although auditors are now expected to use a more vigorous audit process in deciding whether to

issue going-concern or other qualified opinions to financially distressed firms, our preliminary

results show that there is no significant difference between the two periods.

Key words: Audit Decision, Going-Concern, Opinion, Z-score, Industry Failure Rate

The Effect of Sarbanes Oxley, Page 1

Journal of Finance and Accountancy

INTRODUCTION

The Enron and Arthur Andersen failures in late 2001 and early 2002, respectively, led to

the enactment of the Sarbanes-Oxley Act (SOX) in July 2002. Audit firms now claim that they

have become much more conservative with respect to client retention and acceptance decisions

because the risks associated with auditing increased significantly as a result of the SOX (Rama &

Read, 2006). For example, the act greatly altered the...