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

45 Pages Posted: 4 Dec 2012 Last revised: 9 Sep 2014

Brant E. Christensen

University of Missouri-Columbia

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Nathan Y. Sharp

Texas A&M University - Department of Accounting

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Date Written: September 5, 2014

Abstract

Prior research has established that from 2000 to 2007, auditors incorporated clients’ financial reporting risk in their pricing of audit engagements (Charles et al. 2010; Doogar et al. 2010, 2013). However, regulators have expressed concern that the economic downturn and pressure from clients to reduce audit fees has had a negative impact on auditor effort. Our evidence suggests a marked decline in the pricing of financial reporting risk during the 2006-2010 period, further suggesting a reduced focus on the risk of misreporting during that period. This decline is particularly evident among non-industry expert auditors. Connecting these findings to audit quality, we observe a higher likelihood of subsequent accounting restatements among clients whose financial reporting risk appears to be insufficiently incorporated in audit fees, particularly among clients of small audit firm offices. Our results are consistent with a return to the commoditization of financial statement audits and its negative impact on audit quality.

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

Suggested Citation

Christensen, Brant E. and Omer, Thomas C. and Sharp, Nathan Y. and Shelley, Marjorie K., Pork Bellies and Public Company Audits: Have Audits Once Again Become Just Another Commodity? (September 5, 2014). Available at SSRN: https://ssrn.com/abstract=2184413 or http://dx.doi.org/10.2139/ssrn.2184413

Brant E. Christensen (Contact Author)

University of Missouri-Columbia ( email )

332 Cornell Hall
Columbia, MO Columbia 65211
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Nathan Y. Sharp

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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