The Effect of Regulation and Financial Distress on Banks' Auditor Fees

• DOI: http://doi.org/10.1002/jcaf.22357
• Published date: 01 October 2018
• Date: 01 October 2018

The Effect of Regulation and

Financial Distress on Banks’

Auditor Fees

Wayne H. Shaw and William D. Terando

INTRODUCTION

The first 15 years

of the current century

have been notewor-

thy for two signifi-

cant pieces of

legislation impacting

the financial markets,

the Sarbanes–Oxley

Actof2002(SOX)

and the Dodd–Frank

Wall Street Reform

and Consumer Protec-

tion Act of 2010

(Dodd–Frank), which

surrounded the largest

financial crisis since

1929, the 2008 finan-

cial collapse. To date,

auditing research has

focused primarily on

the effect of SOX on

audit pricing, docu-

menting a significant

increase in fees during

that period. For exam-

ple, Ghosh and Pawle-

wicz (2009) document

a 74% increase in

auditing pricing

attributable to the Act

for industrial firms

while Shaw and Ter-

ando (2014) find an

88.4% increase for real

estate investment

trusts.

In contrast, few

studies have focused

on the impact of the

2008 financial col-

lapse or Dodd–Frank

on audit pricing and

those who have docu-

ment little or no

impact of these two

events. While Chen,

Lam, Smieliauskas,

and Ye (2016) find a

positive association

between the level of

discretionary loan loss

provisions and audit

fees and Malhotra,

Poteau, and Russel

(2015) discover a

negative association

between audit prices

and firm performance

during the financial

The purpose of this article is to provide a

comparison of the impact on audit pricing of the

Sarbanes–Oxley Act of 2002 to that of the 2008

financial collaps e and the resulti ng Dodd–Frank

Wall Street Reform and Consumer Protection Act

of 2010. While prior studies have documented

increased audit costs due to SOX, they have not

found such increases related to the other two

events. We extend this research into the subsequent

two events by focusing on audit pricing in the

banking industry since that industry was most

directly impacted by the financial crisis and Dodd–

Frank. In contrast to the prior literature based on

industrial firms, we find banks experienced

significant increases in audit fees related to Dodd–

Frank that were unexplained by traditional control

variables. Finally, we find mixed evidence of

economies of scale in dealing with the costs of

implementing the legislation. While only smaller

banks had a significant increase in audit fees as a

percentage of total assets for Dodd–Frank, larger

banks experienced significantly higher audit costs

due to SOX. © 2019 Wiley Periodicals,Inc.

JEL Classification: G01, G21, M42, M48

Refereed (Double-Blind

Peer Reviewed)

© 2019 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22357

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