Christian Leuz is the Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago Booth School of Business. This post is based on an article authored by Professor Leuz; Brandon Gipper of the Accounting Area at the University of Chicago Booth School of Business; and Mark Maffett, Assistant Professor of Accounting at the University of Chicago Booth School of Business.
As the accounting scandals in the early 2000s illustrated, reliable financial reporting is a cornerstone of trust in the stock market, which in turn plays a key role for investor participation (Guiso et al., 2008). In an effort to restore trust in financial reporting after the scandals, the U.S. Congress passed the Sarbanes-Oxley Act (hereafter, “SOX”). One of its core provisions was the creation of the Public Company Accounting Oversight Board (hereafter, the “PCAOB”) and the requirement that the PCAOB inspect all audit firms (hereafter, “auditors”) of SEC-registered public companies (hereafter, “firms” or “issuers”). The introduction of the PCAOB represents a major regime shift, replacing self-regulation with public oversight.