SUMMARY: We examine changes in auditor fees around the Sarbanes‐Oxley Act (SOX). Audit fees are expected to increase after SOX due to an increase in both audit effort and auditors' expected legal liability. Our results indicate an economically large increase in audit fees following the enactment of SOX. Controlling for audit and client characteristics, we find that audit fee levels rose approximately 74 percent in the post‐SOX period. Nonaudit fees fell significantly over the same period, but total fees paid to auditors rose because the increase in audit fees more than offset the decline in nonaudit fees. Additionally, we find that the Big 4 audit firms increased audit fees by 42 percent more than their smaller counterparts. Finally, we find that while small and large audit firms discount fees on initial engagements to attract new clients in the pre‐SOX period, only small audit firms continue to offer fee discounts for the post‐SOX years. Our findings are robust to a host of sensitivity tests.

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