Regulatory Spillovers in Common Audit Markets

• In Event: Securities Regulation - I

Abstract

We find that Sarbanes-Oxley (SOX) had large, persistent effects on how nonpublic entities access the audit market. Private companies reduced their use of attested financial reports in bank financing by 12%. For nonprofit organizations (NPOs), audit fee increases and the rate of switching to smaller audit firms more than doubled. We trace these effects to a shortage of audit labor by studying exogenous variation in audit labor availability across otherwise similar clients. Moreover, as a result of the substantial auditor switches in the nonprofit market, we find the audit supply structure changed. Both the audit supply concentration and Big 4 market share dropped in half. These changes in supply structure are persistent through 2011. Our results demonstrate how public company regulation causes spillovers for nonpublic entities, and identifies significant consequences of regulations that expand beyond audit and disclosure requirements for public firms.

Authors

• Raphael Duguay, The University of Chicago

• Michael Minnis, The University of Chicago

• Andrew Gordon Sutherland, Massachusetts Institute of Technology