The Impact of PCAOB Auditing Standard 5 on Audit Fees

Wei Jiang, PhD, and Jia Wu, PhD

Several provisions of the Sarbanes-Oxley Act of 2002 (SOX) have led to tightened audit regulations and considerable increases in audit fees. For example, SOX section 103 requires audit workpaper retention for a minimum of seven years, and section 404(b) requires that auditors attest to management's assessment of its internal controls. In 2004, the Public Company Accounting Oversight Board (PCAOB) issued Auditing Standard 2 (AS2), An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, to address these new audit requirements. Due to the added audit work, auditors tended to charge higher audit fees, and companies had to devote more resources to meet the new requirements. A number of publicly traded companies have expressed their concerns about the increased financial and staffing burdens as a result of these more stringent auditing regulations. In some extreme cases, to avoid the added burdens, some of these companies have either gone private or moved to securities markets in other countries. In reaction to the high compliance costs and other concerns, the SEC postponed SOX section 404(b) auditor attestation requirements four times (to fiscal years ending after December 15, 2009), for nonaccelerated filers that were primarily small entities.