Audit Fees after Remediation of Internal Control Weaknesses

Posted: 4 Oct 2010

See all articles by Vishal Munsif

Vishal Munsif

California State University, San Bernardino

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Dasaratha V. Rama

Florida International University (FIU)

Meghna Singhvi

Loyola Marymount University - Department of Accounting

Date Written: September 1, 2010

Abstract

In this study we examine audit fees for SEC registrants that remediate previously disclosed material weaknesses in internal control. We find that remediating firms have lower audit fees when compared to firms that continue to report material weaknesses in internal control. However, the remediating firms continue to pay, in the year of remediation as well as one and two years subsequent to remediation, a significant audit fee premium compared to firms that have clean Section 404 reports in each of the first four years. Firms that had an adverse Section 404 report only in the first year but remediated the problems in year two and had clean Section 404 reports in years three and four pay an audit fee premium of 32 (21) percent in the third (fourth) year when compared to firms that had clean Section 404 reports in each of the first four years. The results thus suggest that audit fees are “sticky” for firms that have material weaknesses in internal controls over financial reporting, and suggest some interesting questions for future research.

Suggested Citation

Munsif, Vishal and Raghunandan, Kannan and Rama, Dasaratha and Singhvi, Meghna, Audit Fees after Remediation of Internal Control Weaknesses (September 1, 2010). Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1687134

Vishal Munsif

California State University, San Bernardino ( email )

5500 University Parkway
San Bernardino, CA 92407
United States

Kannan Raghunandan (Contact Author)

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

Dasaratha Rama

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Meghna Singhvi

Loyola Marymount University - Department of Accounting ( email )

One LMU Dr.
Hilton 317
Los Angeles, CA 90045
United States

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