Audit Fees Post-SOX: An Auction Model

Abstract

The literature shows that audit fees have increased after the SOX ban to audit clients on non-audit services (NAS) but the reason behind it has been unclear until now. Using an auction modeling approach, this study aims to bridge this gap by providing a theoretical explanation for this enigma. In the first auction setting, auditors can compete for both auditing and NAS (the pre-SOX setting). We then investigate how the auction would look when auditors can compete on either auditing or NAS (the post-SOX setting). We show that audit fees will be higher in the post-SOX setting than the pre-SOX one. Furthermore, we show that the SOX ban on NAS would actually make auditors better off than before if NAS budgets remain at, or exceed, the pre-SOX amounts. This result holds even if NAS budgets were reduced but not drastically.

Keywords: Auctions, Auditing, Audit Fees, Nonaudit Services, Serbanes-Oxley