The Impact of Trade Secrecy Protection on Audit Pricing

Because auditors have access to corporate information, a firm’s decision to protect material trade secrets should, in principle, not influence audit effort. We analyze the effects of trade secrecy protection on the audit fees, documenting that firms with redacted information pay significantly higher fees than those that do not redact information. In cross-sectional tests, we further document that the relationship between redaction and audit fees is significantly influenced by both auditor and client characteristics. Consistent with the premise that redaction increases the complexity of the audit—particularly if auditors view redacted disclosures as indicators of potential business or litigation risk—the regression results indicate that the main effect is moderated by auditor factors such as specialization, tenure, and quality, as well as client factors like existing relationships, bargaining power, and reporting quality. These insights contribute to ongoing discussions in audit policy by illustrating how confidential disclosure practices affect audit effort and costs. Overall, our results inform policymakers seeking to reconcile firms’ proprietary information protection with public interest in transparent and credible financial reporting.