Audit Fees Nonaudit Fees and SOX 12-2007

Does Consulting Lead to Audit Lowballing: Longitudinal Evidence from Audit Fees Monika Causholli University of Florida W. Robert Knechel University of Florida Jason MacGregor Baylor University December 2007 Preliminary Draft: Please do not cite without author’s permission. 1Does Consulting Lead to Audit Lowballing: Longitudinal Evidence from Audit Fees Abstract In this paper, we examine how audit fees changed after the passage of the Sarbanes-Oxley Act of 2002 (SOX) conditional on the level of non-audit fees and the quality of corporate governance in the pre-SOX period. We find that firms that purchase high levels of non-audit services from their auditor prior to SOX experience an abnormal increase in their audit fees after SOX. The post-SOX fee increases could indicate either compromised auditor independence or knowledge spillovers. In order to disentangle between these two competing explanations, we also examine the effect of pre-SOX quality of corporate governance on post-SOX audit fees. We find a positive association between audit fees and corporate governance, both before and after SOX. We also find that firms with pre-SOX poor corporate governance and high non-audit services experience an abnormal increase in their audit fees post-SOX. This may indicate that auditor independence is compromised because knowledge spillovers is not expected to be affected by the quality of ...