The Association Between Financial Reporting Risk and Audit Fees Before and After the Historic Events Surrounding SOX
35 Pages Posted: 30 Sep 2008 Last revised: 1 Nov 2009
Date Written: September 1, 2008
This study investigates whether the association between financial reporting risk and audit fees changed during 2000-2003: a time period marked by momentous and historic events for auditors. We find a positive statistically and economically significant relationship between financial reporting risk and audit fees paid to Big 4 auditors. More importantly, we predict and find that the relation between financial reporting risk and audit fees strengthened significantly in 2002 and 2003, consistent with a shift in the way auditors priced risk, likely in response to the events surrounding the Sarbanes-Oxley Act of 2002. Finally, we provide evidence that a commercially developed, comprehensive risk measure effectively proxies for an element of risk beyond what has traditionally been captured by various risk measures in audit fee models: namely, the risk that financial statements have been intentionally misstated. We believe this risk measure will be of interest to future researchers.
Keywords: audit fees, financial reporting risk, audit risk, Sarbanes-Oxley
JEL Classification: M49, M41, M43, G38
Suggested Citation: Suggested Citation