The Impact of Sarbanes-Oxley Section 206 on Investors' Perceptions of the Pre-Departure Revolving Door Phenomenon

• In Event: Auditing and Investing
  In Paper Session: Auditing and Investing Research

Abstract

Purpose – The Sarbanes-Oxley Act was designed to help protect investors without the necessary knowledge to protect themselves (SEC 2004), yet it continues to be scrutinized by practitioners and academicians. This study examines the impact of the Sarbanes-Oxley Act’s revolving door safeguards on nonprofessional investors’ perceptions of auditor independence when a member of the audit team receives an employment offer from an audit client (pre-revolving door phenomenon, hereafter).

Design/methodology/approach – Nonprofessional investors respond to a within-subjects experiment, which measures (1) whether the strength of the revolving door policy improves perceptions of independence, and (2) whether non-public company auditors should adopt public company auditors’ revolving door policy.

Findings –Investors perceive auditor independence to improve as the strength of the revolving door safeguards increases from the American Institute of Certified Public Accountants’ safeguards to the Sarbanes-Oxley Act’s revolving door safeguards, as well as when the Independence Standards Boards’ peer review safeguard is added to the Sarbanes-Oxley Act’s safeguards. These results hold for both public and non-public company auditors.

Practical Implications – In light of the increasing perceptions of independence as the strength of the safeguards increase, accounting regulators may consider the sufficiency of the Sarbanes-Oxley Acts’ revolving door safeguards, and whether non-public company auditors should be subject to similar safeguards.

Contribution – This is the first study to empirically establish that the pre-revolving door phenomenon impairs objectivity in the post-Sarbanes-Oxley regime.

Author

• Reginald Wilson, The University of Southern Mississippi