AAA Spark Meeting of Regions

Consequences of Non-Financial Misconduct

• In Event: Audit Pricing, Non-Financial Misconduct and Client Ethics

Abstract

This paper examines how non-financial misconduct by corporations impacts the costs and outcomes of audits. Our results suggest that auditors increase fees for firms that receive penalties for their non-financial misconduct and charge more when the penalty amount is higher. The magnitudes are economically significant: violating firms pay about $193,000 or 7.68% more in audit fees than comparable firms without violations. Additionally, audit fees are further increased when infractions are more egregious, as represented by multiple agencies levying penalties within the year. Further, companies that are fined for non-financial misconduct are more likely to receive going concern opinions, even after controlling for other confounding financial factors. These results are robust to fixed effects, propensity score matching, and falsification tests, and show that non-financial misconduct has significant corporate impact which extends beyond the penalties imposed by enforcement agencies.

Authors

• Bidisha Chakrabarty, Saint Louis University

• Michael Hyman, Merrimack College

• Gopal V. Krishnan, Bentley University