The Sarbanes-Oxley Act of 2002 (SOX) represents a far-reaching legislative attempt to
improve the quality of financial reporting in the United States in response to the major
accounting frauds of the late 1990s and early 2000s (Klein 2003). A significant change
imposed by SOX was to prohibit the outsourcing of internal audit services to firms’ external
auditors.1 Competing academic arguments suggest that this ban will either improve or
worsen financial reporting quality.