The Impact of the Sarbanes-Oxley Act of 2002 on the Value Relevance of Nonaudit Fees

In the wake of the Enron and WorldCom accounting scandals, nonaudit services provided by auditors have come under the scrutiny of Congress as reflected in the Sarbanes-Oxley Act of 2002. In an attempt to better understand the impact of the Act, this study sets forth two specific objectives. The first objective is to examine the value relevance of auditor’s fees. The other objective is to investigate which components of the fees, if any, are important in the determination of firm values. We find that nonaudit fees have a positive association with firm values, which suggests that investors perceive nonaudit services as value increasing services. Among the components of auditor’s fees, audit related fees and tax fees have significant positive relationships with firm values. These results are contrary to the prevailing belief that nonaudit services impair auditor independence. However, in additional analysis, we find that investors’ perception of nonaudit fees has changed. In particular, investors react more favorably to an increase in nonaudit service fees after SOX while they did not have such a reaction prior to SOX.