Abnormal Audit Fees and Reliability of Internal Control Audit Opinions

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 11: Internal Controls

Abstract

Recent literature and regulatory discussions highlight concerns over the reliability of internal control reports under Section 404 of the Sarbanes-Oxley Act (SOX 404). I examine the association between abnormal audit fees and the likelihood of MW disclosures to investigate whether auditor independence or auditor effort influences the reliability of internal control audit opinions. After controlling for determinants of material weaknesses (MWs) in internal controls, I find that abnormal audit fees are positively associated with the likelihood of MW disclosures. This positive association persists in a restricted sample of firms with existing MWs in internal controls, where the uncertainty around the existence of MWs is removed. Overall, these results suggest that abnormal audit fees are indicative of unexpected audit effort that influences the ability to detect existing MWs. In other words, greater abnormal audit fees reflect enhanced audit effort (rather than auditor rents that can impair auditor independence), resulting in more reliable internal control audit opinions.

Author

• MinJeong (Minna) Hong, University of Waterloo