Enterprise Risk Management System Quality, Audit Fees and Audit Delay: An Empirical Examination of Insurance Companies

• In Event: Session D: Doctoral Student Papers

Abstract

This study examines the associations between the quality of firms’ enterprise risk management (ERM) systems and their audit fees and audit delays. We use the Standard & Poor’s ERM system quality ratings for a group of insurance/reinsurance companies and hypothesize that stronger, higher quality ERM systems have stronger internal controls and thus lead to greater reliance by the firms’ external auditors on those controls. Greater reliance on higher quality controls should reduce audit fees and audit delay (Felix et al. 2001, Ettredge et al. 2006). Estimating audit fee and audit delay models using a sample of 338 firm-year observations, we find that higher-quality ERM systems are associated with lower audit fees and shorter audit periods. However, we find that this association is nonlinear and that much of the audit pricing and audit delay benefit from improving ERM systems is captured when firms improve their ratings from weak to adequate. Improvements beyond adequate systems provide more limited (though still statistically significant) benefits.

Authors

• Denton Collins, Texas Tech University

• Cristina Bailey, Texas Tech University