Unexpected Consequences: The Effects on Non-Accelerated Filers of an Accelerated Filing Deadline and SOX Section 404

Abstract

Regulations implemented by the SEC in 2003 and 2004 simultaneously shortened the financial statement filing deadlines and increased the time required for both the preparation of financial statements and the related audit of accelerated filers (AFs). However, there were indirect, unintended negative consequences for companies not subject to the regulations, namely, non-accelerated filers (NAFs). The new regulations imposed strains on auditor resources requiring auditors to make resource allocation decisions that negatively affected NAFs. We find that NAFs with an auditor who had a high proportion of AF clients (high-AF) had longer audit delays after the regulations were implemented than NAFs of an auditor with a low proportion of AF clients (low-AF). Further, we document that NAFs with high-AF auditors were more likely to change auditors than NAFs with low-AF auditors. Finally, NAFs that switched to auditors with less AFs experienced shorter audit delays after the auditor change.

Audit partner characteristics, career advancement and audit quality in the USA

“…Recognizing the systematic differences between Big N and non-Big N firms, prior literature routinely controls for the Big N effect (Lennox and Pittman, 2010;DeFond and Zhang, 2014;Bills et al, 2016b;Berglund et al, 2018;Dong et al, 2020). Studies show that after controlling for audit firm and office effects, audit partner characteristics have an incremental effect on their clients' audit quality (Gul et al, 2013;Aobdia et al, 2015).…”

Office level contagion: impact of a non-timely filing by a major busy season client

“…Prior studies show that offices with a high proportion of LAFs negatively affect the audit timeliness of NAFs in the office. The small clients (NAFs) in offices with a high proportion of LAFs were more likely to switch audit firms than small clients at offices with a low proportion of LAFs (Dong et al , 2020). Prior literature shows that large clients are prioritized by auditors due to the importance of a client in the portfolio.…”