The effects of Section 404 of Sarbanes-Oxley Act of 2002 on the audit fees of foreign firms listed on US exchanges

Purpose – The purpose of this study is to examine the change in audit fees for US-listed foreign firms in their first year of providing Section 404 auditor attestation reports for fiscal years ending between July 15, 2006 and July 14, 2007. Design/methodology/approach – During the sampling time period, foreign large accelerated filers had to provide both auditor and management Section 404 reports while the foreign accelerated filers only had to provide management Section 404 reports without the auditor attestation reports. Foreign non-accelerated filers did not have to provide any Section 404 report. This research design and sample allows the authors to control for the general market-wide increases in audit fees. The paper examines the annual change in audit fees from the preceding year to the first year of Section 404 compliance. Findings – It is found that foreign large accelerated filers have an average increase of 74 percent in audit fees in this first year of Section 404 compliance, while the foreign accelerated filers and non-accelerated filers only have increases in audit fees of 33 percent and 42 percent, respectively. Since this research design and sample allow the authors to control for the general market-wide increases in audit fees, the authors are able to conclude that foreign large accelerated filers incurred, on average, a 30 percent increase in audit fees just to comply with Section 404. It is also found that the increase in audit fees among foreign large accelerated filers is negatively associated with the strength of their home countries' legal environment. Originality/value – Arguably, Section 404 is perhaps the most controversial aspect of Sarbanes-Oxley Act due to its high audit fees. The results of this study would provide interesting findings to regulators and researchers.