Determinants of Section 404 Fees Paid to the External Auditor

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 13: Auditor Pricing Studies

Abstract

We examine the determinants of Section 404 fees paid to the external auditor [hereafter Internal Controls Evaluation (ICE) fees]. Due to the current disclosure regime, information on ICE fees is not publicly-available. Using survey responses from 172 Chief Audit Executives (CAEs) for the fiscal year 2009, we obtain information concerning ICE fees, the presence of high risk entity-level controls, the use of controls self-assessments (CSA) as a means of monitoring controls and internal audit function (IAF) characteristics. We find that firms with high risk entity level controls pay significantly higher ICE fees, whereas firms utilizing CSA to monitor controls pay significantly lower ICE fees. We find that IAF-provided Section 404 assistance significantly reduces ICE fees. Our results indicate that internal control quality may be best characterized as a spectrum, rather than a dichotomous step function described by a presence/absence of a material weakness.

Authors

• Lawrence Abbott, University of Wisconsin–Milwaukee

• Susan Parker, Santa Clara University

• Gary Peters, University of Arkansas

• Theresa Presley, Kansas State University