The Effects of Financial Statement Disaggregation on Audit Pricing
Koh K., Y. H. Tong, & Z. Zhu. The Effects of Financial Statement Disaggregation on Audit Pricing. International Journal of Auditing, Forthcoming.
Posted: 15 Jun 2016 Last revised: 19 Oct 2021
Date Written: October 3, 2021
We examine whether the extent of financial statement disaggregation affects the pricing of audit engagements in the US. We hypothesize and find that auditors assess higher engagement risk and charge higher audit fees for clients with more disaggregated financial statements. We also find that these higher audit fees are not the result of either increased auditor effort to mitigate detection risk or heightened inherent and control risks reflected in lower financial reporting quality. Instead, we document that greater financial statement disaggregation is positively associated with litigation risk. This result suggests that higher audit fees arise out of auditors’ assessments of heightened client and auditor business risks associated with litigation. While financial statement disaggregation may have beneficial effects on the quality of financial information, we document that financial statement disaggregation can impose costs on firms in terms of higher audit fees and a higher likelihood of litigation. Our study informs standard setters, firms, and auditors as they debate the costs, benefits, and extent of disaggregation to be presented in financial statements.
Keywords: financial statement disaggregation, audit fees, financial reporting quality, litigation risk, audit risk
JEL Classification: M41, M42
Suggested Citation: Suggested Citation