Earnings management before and after the Sarbanes Oxley Act

The purpose of this thesis is to provide an answer to the research question of how the Sarbanes Oxley Act has impacted the relationship between the auditor and earnings management in the United States. Evaluating the extant literature on the SOX act and the auditor it has been established that the SOX act has changed the way the auditor relates to its clients. Using the modified Jones model the thesis provides an answer through evidence showing that earnings are managed differently in the Post-Sox period in comparison with the Pre-Sox Period. The results show that earnings management has decreased in the Post-Sox period versus the level of the earnings management in the Pre-Sox period. Furthermore, earnings management for firms audited by the Big 4 group in the Pre-Sox period is lower than for firms audited by the Non-Big4 group. Lastly, the results show that the effects of the Big 4 auditors on earnings management of their client firms become more pronounced and significantly negative in the Post-Sox period.