In this dissertation, I examine the effects of regulatory changes that affect the auditor's loss function on investors' perceptions of audit effectiveness. Specifically, I examine two changes intended (1) to improve audit efficiency and (2) to reduce auditor liability exposure. The first regulatory change, which was recently enacted, is the replacement of Auditing Standard 2 (AS2) with Auditing Standard 5 (AS5). The second regulatory change, which is currently a hypothetical change, is the passage of litigation reform aimed at limiting the auditor's liability exposure following an alleged audit failure. I examine perceived audit effectiveness rather than actual effectiveness because actual audit effectiveness is unobservable by investors. In an experiment using 101 MBA students as proxies for individual investors, I find that both changes are perceived by investors as reducing the amount of testing performed by the auditor when performing the internal control audit. I also find that both regulatory changes negatively affect investors' perceptions of audit effectiveness. Following the change in the auditing standard, experienced and inexperienced investors predict opposite stock price movement and, as a result, make different investment allocation decisions. In performing supplemental analyses, I find significant gender differences in predicted future stock prices, but not in perceptions of audit effectiveness or in perceptions of internal control quality.

Formed under the provisions of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) was charged with providing the interpretive guidance for auditors to use in carrying out their responsibilities under Sarbanes-Oxley Section 404. Auditing Standard No. 2 (AS2) provided the initial guidance to auditors beginning in 2004. Early research on audit delay and audit fees under these new requirements revealed significant increases in both. Although audit delay and audit fees decreased in subsequent years, they remained much higher than predicted. As a result of the concerns and complaints of the accounting profession and the public firms affected by AS2, the PCAOB rescinded AS2 and replaced it with Auditing Standard No. 5 (AS5) in 2007. The primary objective of the new guidance focuses the auditors’ attention on the most important matters in the audit of internal controls over financial reporting and eliminating procedures that the Board believes are unnecessary to an effective audit of internal control. Intended to streamline the audit process, the goal of the PCAOB was to reduce audit delay and audit fees. Research in the AS5 era has produced mixed results for both. In this study, I extend the early AS5 research to determine if AS5 has had a significant impact on reducing both audit delay and audit fees. Using multiple regression analysis, I examine audit delay and audit fees from 2007 through 2013 to determine their long-term trend. Data sources include Audit Analytics, Compustat, and CRSP. Based on the literature review, I expect to find a decrease to both audit delay and audit fees over the long-term.