The Effect of Sarbanes-Oxley on the Real Estate Investment Industry

• In Event: Financial Accounting and Reporting III

Abstract

This paper examines the incremental effect the Title I-III Sarbanes-Oxley independence/non-audit work rules and Section 404 internal control review provisions had on the level of audit fees charged by CPA firms to their clients and the extent to which the increase in the audit fee was offset by the decline in non-audit fees. Focusing on the real estate investment trust industry, we document a 344% increase in audit fees between 2001 and 2005. Of this amount approximately 72% is attributable to the implementation of the Section 404 audits. However, 28% of the increase occurred between 2001 and 2003 because of the auditor independence/non-audit prohibitions. Finally, we document that this earlier increase was substantially offset by a reduction in non-audit fees (primarily tax-related fees).

Authors

• Robert F Gary, The University of New Mexico

• William Terando, Butler University

• David B Smith, University of Nebraska–Lincoln