Pork Bellies and Public Company Audits: Have Audits Once Again Become Just Another Commodity?

Abstract:     
Prior research has shown that between 2000 and 2003, auditors increased their audit-fee sensitivity to the risk that clients had intentionally misrepresented their financial statements and that this ability to price risk persisted through 2007 (Charles et al. 2010; Doogar et al. 2010, 2012). However, regulators have expressed concerns about how the economic downturn and the resulting fee pressure have impacted auditor effort (PCAOB 2010b). We investigate the association between financial reporting risk and audit fees between 2006 and 2010. We provide initial evidence of a marked decline in auditors’ pricing of financial reporting risk during the 2006-2010 period, suggesting auditors have not maintained their increased focus on the risk of intentional misreporting in recent years. This decline is particularly evident among non-industry expert auditors. Our results are consistent with an alarming return to the commoditization of financial statement audits.

Number of Pages in PDF File: 42

Keywords: Audit fees, financial reporting risk, fee pressure, economic downturn, auditor expertise

working papers series