The Division of Audit & Non-Audit Services - An Investigation of the Effects of Section 201 of the Sarbanes-Oxley Act on the Activities of Swedish Auditing Firms

Abstract

Background and problem: As a response to recent corporate scandals, a new law, the Sarbanes-Oxley Act, was passed in the United States on July 30, 2002. The law applies to all companies, American as well as foreign, that are listed on American stock exchanges. The auditors of companies that are located in Sweden but are affected by the Act must therefore adjust to the new rules. Section 201 of the Act prohibits an auditing firm from providing an audit client with certain non-audit services. Since most firms offer both audit and non-audit services and often perform both kinds of services to their clients, the regulations of Section 201 will have impact on the activities of Swedish auditing firms.

Purpose: The purpose of this research is to describe the effects that the division between audit and non-audit services in Section 201 of the Sarbanes-Oxley Act will have on the activities of Swedish auditing firms. This is to be done by analyzing how the auditing market and auditing firms adapt to the new regulations. It is also our aim to increase knowledge of the importance, applicability and the implementation of Section 201 of the Sarbanes-Oxley Act.

Delimitations: Because most Swedish companies and Swedish subsidiaries of foreign companies that are affected by the law are audited by one of the major four auditing firms (KPMG, Ernst & Young, PricewaterhouseCoopers and Deloitte), the thesis is written from their point of view. Therefore we only find it relevant to interview representatives of the Big Four. It is also important to remember that the effects that Section 201 of the Sarbanes-Oxley Act have on the affected companies lies outside the scope of the thesis.

Methodology: The thesis is based on personal in-depth interviews with Swedish representatives of the Big Four auditing firms. In addition to these interviews, four short interviews have been carried out with persons that are connected to the issue. The thesis is of a qualitative character and has a descriptive and an explanatory approach.

Results and conclusions: We have drawn the conclusion that Section 201 of the Sarbanes-Oxley Act will not have great effects on the activities of Swedish auditing firms. However, there are areas that are likely to be affected, indirectly, by the demand for division between audit and non-audit services. We are of the opinion that audit fees may increase while non-audit fees may decrease. The prohibited services may increase the appearance that the auditing firms are independent and we also believe that the competition on the market for non-audit services may toughen. Also, the impact of Section 201 may increase if the proposal for a new EU Directive on statutory audit is passed.

Suggestions for further research: This thesis is written from the auditors’ point of view. It would, therefore, be of great interest to investigate what effects the regulations of Section 201 will have on the Swedish companies that are affected by the Act.