IDEAS home Printed from https://ideas.repec.org/a/eee/reacre/v20y2008icp103-126.html
   My bibliography  Save this article

Audit pricing and internal control disclosures among non-accelerated filers

Author

Listed:
  • Bedard, Jean C.
  • Hoitash, Udi
  • Hoitash, Rani

Abstract

In this paper we examine the association of audit fees with disclosures regarding internal control effectiveness under Section 302 of the Sarbanes-Oxley Act of 2002 (SOX). In contrast to previous studies, we focus on non-accelerated filers, whose eventual compliance with the costly provisions of SOX Section 404 internal control reporting has become a contentious issue. While auditors are not required to test controls under Section 302, we find that companies disclosing Section 302 problems pay higher audit fees, suggesting greater engagement effort and/or a risk premium. Further, our results indicate that fees are adjusted for risk associated with problem severity, but relative risk adjustment does not change between 2003 and 2004. We also find a significant fee increase for “clean” companies in 2004, although there was no change in regulation for non-accelerated filers in that year. Further examining fee changes from 2003 to 2004, we find that companies remediating internal control problems disclosed in 2003 continue to pay higher fees in 2004, and fees of first-time disclosers in 2004 are significantly higher. Additionally, audit fees are higher for both continuing and new clients of the Big 4, lower for companies switching away from Big 4 firms and unchanged for companies switching to another Big 4 firm.

Suggested Citation

  • Bedard, Jean C. & Hoitash, Udi & Hoitash, Rani, 2008. "Audit pricing and internal control disclosures among non-accelerated filers," Research in Accounting Regulation, Elsevier, vol. 20(C), pages 103-126.
    • Handle: RePEc:eee:reacre:v:20:y:2008:i:c:p:103-126
    DOI: 10.1016/S1052-0457(07)00206-8
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1052045707002068
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/S1052-0457(07)00206-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. William L. Felix, Jr. & Audrey A. Gramling & Mario j. Maletta, 2001. "The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 513-534, December.
    2. Ettredge, M & Greenberg, R, 1990. "Determinants Of Fee Cutting On Initial Audit Engagements," Journal of Accounting Research, Wiley Blackwell, vol. 28(1), pages 198-210.
    3. Okeefe, Tb & Simunic, Da & Stein, Mt, 1994. "The Production Of Audit Services - Evidence From A Major Public Accounting Firm," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 241-261.
    4. Emilie Feldman, 2006. "A Basic Quantification of the Competitive Implications of the Demise of Arthur Andersen," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 193-212, November.
    5. Karl Hackenbrack & W. Robert Knechel, 1997. "Resource Allocation Decisions in Audit Engagements," Contemporary Accounting Research, John Wiley & Sons, vol. 14(3), pages 481-499, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pinto, Inês & Morais, Ana Isabel & Quick, Reiner, 2020. "The impact of the precision of accounting standards on the expanded auditor’s report in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    2. Cianci, Anna M. & Convery, Amanda M. & Evans, Mark E. & Hughen, Linda & Werner, Edward M., 2021. "The impact of costly regulation on R&D investment levels and productivity," Advances in accounting, Elsevier, vol. 53(C).
    3. R. Mithu Dey & Mary W. Sullivan, 2012. "Was Dodd-Frank justified in granting internal control audit exemption to small firms?," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(7), pages 666-692, July.
    4. Li, Chan & Raman, K.K. & Sun, Lili & Wu, Da, 2017. "The effect of ambiguity in an auditing standard on auditor independence: Evidence from nonaudit fees and SOX 404 opinions," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(1), pages 37-51.
    5. Thomas G. Calderon & Li Wang & Thomas Klenotic, 2012. "Past control risk and current audit fees," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(7), pages 693-708, July.
    6. Dowdell, Thomas D. & Kim, Jang-Chul & Klamm, Bonnie K. & Watson, Marcia Weidenmier, 2013. "Internal control reporting and market liquidity," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 30-40.
    7. Weiss, Renee & Kalbers, Lawrence, 2013. "Determinants of auditor changes for non-accelerated filers," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 13-29.
    8. Fukukawa, Hironori & 福川, 裕徳 & Karube, Masaru & 軽部, 大, 2013. "Audit Firm Switch and Engagement Partner Continuance," IIR Working Paper 13-05, Institute of Innovation Research, Hitotsubashi University.
    9. Ji, Xu-dong & Lu, Wei & Qu, Wen, 2018. "Internal control risk and audit fees: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 266-287.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David C. Hay & W. Robert Knechel & Norman Wong, 2006. "Audit Fees: A Meta†analysis of the Effect of Supply and Demand Attributes," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 141-191, March.
    2. Ahsan Habib & Mostafa Monzur Hasan & Ahmed Al-Hadi, 2018. "Money laundering and audit fees," Accounting and Business Research, Taylor & Francis Journals, vol. 48(4), pages 427-459, June.
    3. Karla M. Johnstone & Jean C. Bedard & Michael L. Ettredge, 2004. "The Effect of Competitive Bidding on Engagement Planning and Pricing," Contemporary Accounting Research, John Wiley & Sons, vol. 21(1), pages 25-53, March.
    4. Timothy B. Bell & Rajib Doogar & Ira Solomon, 2008. "Audit Labor Usage and Fees under Business Risk Auditing," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 729-760, September.
    5. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    6. Laurence Kranich & Andrés Perea & Hans Peters, 2005. "Core Concepts For Dynamic Tu Games," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 43-61.
    7. Feng Chen & Songlan Peng & Shuang Xue & Zhifeng Yang & Feiteng Ye, 2016. "Do Audit Clients Successfully Engage in Opinion Shopping? Partner‐Level Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 79-112, March.
    8. Duellman, Scott & Hurwitz, Helen & Sun, Yan, 2015. "Managerial overconfidence and audit fees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 148-165.
    9. David Hay & Robert Knechel & Vivian Li, 2006. "Non‐audit Services and Auditor Independence: New Zealand Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 715-734, June.
    10. Miguel Minutti‐Meza, 2013. "Does Auditor Industry Specialization Improve Audit Quality?," Journal of Accounting Research, Wiley Blackwell, vol. 51(4), pages 779-817, September.
    11. Christensen, Brant E. & Newton, Nathan J. & Wilkins, Michael S., 2021. "How do team workloads and team staffing affect the audit? Archival evidence from U.S. audits," Accounting, Organizations and Society, Elsevier, vol. 92(C).
    12. Lasse Niemi & W. Robert Knechel & Hannu Ojala & Jill Collis, 2018. "Responsiveness of Auditors to the Audit Risk Standards: Unique Evidence from Big 4 Audit Firms," Accounting in Europe, Taylor & Francis Journals, vol. 15(1), pages 33-54, January.
    13. L. Van De Velde & I. De Beelde, 2009. "Audit- and non-audit fees and company characteristics in Belgium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/589, Ghent University, Faculty of Economics and Business Administration.
    14. Nikos Vafeas & James Waegelein, 2007. "The association between audit committees, compensation incentives, and corporate audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 28(3), pages 241-255, April.
    15. Jonathan Njoku, 2012. "Surveillance model of going concern in banking," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 40-76.
    16. Yang, Seunghee & Lee, Woo-Jong & Lim, Youngdeok & Yi, Cheong H., 2021. "Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(2).
    17. Gil S. Bae & Seung UK Choi & Phillip T. Lamoreaux & Jae Eun Lee, 2021. "Auditors' Fee Premiums and Low‐Quality Internal Controls," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 586-620, March.
    18. Jeong, Seok Woo & Jung, Kyueon & Lee, Suk-Jun, 2005. "The effect of mandatory auditor assignment and non-audit service on audit fees: Evidence from Korea," The International Journal of Accounting, Elsevier, vol. 40(3), pages 233-248.
    19. Griffin, Paul A. & Lont, David H. & Sun, Yuan, 2008. "Corporate Governance and Audit Fees: Evidence of Countervailing Relations," Journal of Contemporary Accounting and Economics, Elsevier, vol. 4(1), pages 18-49.
    20. W. Robert Knechel & Marleen Willekens, 2006. "The Role of Risk Management and Governance in Determining Audit Demand," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1344-1367, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reacre:v:20:y:2008:i:c:p:103-126. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/research-in-accounting-regulation .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.