Media Attention and Audit Labor Mix

• In Event: Risk Assesssments and Auditor Judgment

Abstract

This study investigates whether and how auditors respond to client firm media attention using their labor mix and assigning audit labor in their audit risk assessments. Using novel data on audit fees, audit hours, and audit hours by rank, this study finds that auditors charge higher audit fees to client firms that have greater media attention (e.g., media coverage, negative publicity) to reduce audit risk, consistent with the media’s disciplining role. In addition, audit fee increases do not occur via increasing audit risk premiums (e.g., audit fees per hour), but by increasing audit effort (e.g., audit hours) in general, and by increasing the audit hours of partner and senior CPAs rather than junior CPAs in particular. In additional analyses, I find that Big 4 auditors show a stronger association between media attention and greater input from experienced CPAs and that auditors are more likely to resign from clients with greater media attention. Overall, the findings indicate that auditors view media as an information source in audit risk assessment, affecting audit production costs.

Author

• Meeok Cho, Seoul National University