Indicators of audit fees and fraud classification: impact of SOX
Purpose – The purpose of this paper is to compare the effect of corporate governance variables and fraud litigation on audit fees both before and after the implementation of the Sarbanes-Oxley (SOX) Act in 2002. Design/methodology/approach – The paper utilizes a sample of firms that had litigation proceedings filed against them for fraudulent financial reporting, and compare these firms to a sample of non-fraud firms in the pre-and post-SOX period. First, the authors examine indicators of audit fees using the Simunic model. Next, the authors develop a logistic regression model with corporate governance variables and other financial control variables in order to identify the characteristics of firms that are accused of fraud in the pre-and post-SOX period. Findings – The paper identifies specific components of corporate governance that are positively related to audit fees and which subsequently aid in classifying companies subject to fraud litigation. The most successful logistic regression model for 2005 (post-SOX) is 64.4 per cent accurate in distinguishing firms litigated for fraud, while the most successful model for 2001 (pre-SOX) is 61.4 per cent accurate in distinguishing such firms. Originality/value – The research design and findings assist in providing additional evidence about the association between the effectiveness of the corporate governance structure and the external auditor in assessing the risk of fraud.
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Volume (Year): 27 (2012)
Issue (Month): 5 (July)
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References listed on IDEAS
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- Sak Bhamornsiri & Robert Guinn & Richard Schroeder, 2009. "International Implications of the Cost of Compliance with the External Audit Requirements of Section 404 of Sarbanes–Oxley," International Advances in Economic Research, International Atlantic Economic Society, vol. 15(1), pages 17-29, February.
- Fen-May Liou, 2008. "Fraudulent financial reporting detection and business failure prediction models: a comparison," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(7), pages 650-662, July.
- Jenny Goodwin-Stewart & Pamela Kent, 2006. "Relation between external audit fees, audit committee characteristics and internal audit," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 387-404.
- Wenxia Ge & G. Whitmore, 2010. "Binary response and logistic regression in recent accounting research publications: a methodological note," Review of Quantitative Finance and Accounting, Springer, vol. 34(1), pages 81-93, January.
- Ahmed Ebrahim, 2010. "Audit fee premium and auditor change: the effect of Sarbanes-Oxley Act," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(2), pages 102-121, February.
- Santanu Mitra & Mahmud Hossain & Donald Deis, 2007. "The empirical relationship between ownership characteristics and audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 28(3), pages 257-285, April.
- Sameer T. Mustafa & Nourhene Ben Youssef, 2010. "Audit committee financial expertise and misappropriation of assets," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(3), pages 208-225, March.
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