Audit Risk, Perceived Audit Risk and the Financial Crisis of 2008

• In Event: Auditing 2

Abstract

In this paper, we examine how audit fees change in responding to the financial crisis of 2008. We argue that during the financial crisis period, the inherent risk and control risk are more likely to increase. As a result, auditors need to increase audit effort and audit fees to decrease the detection risk and maintain an accepted level of audit risk. Using a sample of 12,298 firm-year observations, we find that, during the financial crisis period, audit fees increase as a result of the macro-systematic risks from the crisis. We also find there is a significantly positive relationship between audit fees and restatements, which is a proxy of risk factors related to poor financial reporting quality and poor audit quality. Furthermore, we investigate whether this relationship between audit fees and restatements strengthened during the financial crisis. The results show that there is no significant change of the relationship in the financial crisis period.

Authors

• Hanmei Chen, Rowan University

• Mei Zhang, Rowan University