Local and Regional Audit Firms and the Market for SEC Audits

In congressional hearings and in responses to the SEC and GAO, auditors have stated that provisions of the Sarbanes-Oxley Act of 2002 (SOA) and related SEC rules changes would cause many local and regional audit firms to terminate audit work for SEC registrants. In this study, empirical evidence is provided about small audit firms and recent changes in the market for SEC audits. It is found that 47 local and regional audit firms disclosed in Form 8-Ks filed in 2002-2003 that they were ceasing all SEC audits; only 8 such firms that made this disclosure in 2000-2001. Many local and regional audit firms that had no SEC audit clients in 2002 voluntarily registered with the PCAOB. Interviews with partners of such audit firms indicate that the primary reason for voluntarily registering with the PCAOB is to signal their audit quality to non-SEC registrants (private companies, nonprofits, etc.) and their stakeholders.