Continuous online auditing as a response to the Sarbanes‐Oxley Act

Abstract

Purpose – The purpose of this paper is to examine investors' perceptions of the usefulness of continuous online auditing (COA) prior to and after the Sarbanes-Oxley (SOX) Act and assesses the current value relevance of continuous auditing. The paper examines two research questions: first, whether continuous online audits significantly impact investors' perceptions of firm risk and, consequently, the value of a firm and second, whether continuous online audits have a greater impact on investor assessment of a firm's risk subsequent to SOX. Design/methodology/approach – A 2?×?2×2?×?2 between participants laboratory experiment was conducted. Technology risk was manipulated at (e-commerce risks versus no e-commerce risks), traditional financial risk was manipulated at (high financial leverage versus low financial leverage), COA was manipulated at (traditional annual audit versus continuous online audits), and pre- and post-SOX was tested (2002 sample versus 2005 sample). The primary dependent variables used were investors' assessment of firm risk and investors' assessment of earnings per share estimates. Additionally, investors' confidence in their investing decision was captured. Findings – Results indicate a demand for COA as reflected in investors' reduced firm risk estimates, and increased confidence in estimates. Comparative results from the 2005 sample and the 2002 sample indicate that the value relevance of COA has increased after the introduction of SOX in July 2002. We attribute this shift to investors' perception that COA is a factor that helps mitigate firm risk and relatedly boosts investor confidence in their investing decisions. Research limitations/implications – Only a single proxy for traditional business risk (financial leverage) is examined. Future studies need to examine the ability of continuous online audits to mitigate other types of traditional business risks. Originality/value – The study establishes the current economic feasibility of continuous online audits. Additionally, the most insightful finding of the study is that the value relevance of COA has increased after the introduction of SOX. This shift is due to investors' perceptions of COA as a factor that mitigates firm risk and helps boost confidence in their investing decisions. Implications for the profession, the classroom and public policy are discussed.