Title

How audit fees are affected by a client under SEC investigation

Source of Publication

International Journal of Accounting, Auditing and Performance Evaluation

Abstract

We examine the effect of a US Securities and Exchange Commission (SEC) investigation of the audit client on audit cost. Ordinary least-squares models along with a match-paired design and publicly available auditor fees data are used to analyse the relation between an SEC investigation event and audit fees. The finding of a positive and significant relation supports our hypothesis that the business risk of a client under investigation by this regulatory agency is perceived to be higher than that of a client not under investigation. This finding is important given that certain factors may work against observing an effect. This study contributes to the literature by determining that auditors charge a statistically and economically significant average audit fees premium that ranges from 49.9% to 56.2% to clients under SEC investigation. One implication is that client management has fee-related incentives to avoid regulatory misconduct/scrutiny and produce financial statements free of material misstatement. © 2014 Inderscience Enterprises Ltd.

Document Type

Article

First Page

153

Last Page

186

Publication Date

1-1-2014

DOI

10.1504/IJAAPE.2014.060209

Author First name, Last name, Institution

Winifred D. Scott, Zayed University
Willie E. Gist, Ohio University

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