Journal of Finance and Accountancy The Effect of Sarbanes Oxley, Page 1 The Effect of the Sarbanes-Oxley Act on Auditors ’ Audit Performance

The issue of audit reporting for financially distressed firms continues to be of interest to the public and to legislators. Previous studies have consistently shown that auditors fail to issue going-concern opinions to more than half of bankrupt firms one year prior to bankruptcy. The Enron and Arthur Andersen failures in late 2001 and early 2002, respectively, led to the enactment of the Sarbanes-Oxley Act (SOX) in July 2002. Audit firms now claim that they have become much more conservative with respect to client retention and acceptance decisions because the risks associated with auditing increased significantly after the enactment of the SOX. The primary purpose of this study is to provide a basis for a proper evaluation of auditors’ performance. We conducted performance comparisons between the pre- and post-SOX periods. Although auditors are now expected to use a more vigorous audit process in deciding whether to issue going-concern or other qualified opinions to financially distressed firms, our preliminary results show that there is no significant difference between the two periods