Does Insider Trading Affect Auditors’ Risk Assessments? Evidence from Audit Pricing
43 Pages Posted: 21 Dec 2017
Date Written: December 17, 2017
Audit regulations require auditors to consider insider trading as part of their assessment of and response to the risk of material misstatement. Moreover, empirical research finds that net insider selling provides information about audit-relevant outcomes such as weak internal controls and fraud. Thus, we investigate whether audit fees reflect the increased risk revealed by insider trading. Consistent with our expectations, we find that audit fees are higher among companies with net insider selling, relative to companies with net insider buying. Further analyses find that the positive association between audit fees and net insider selling is driven by officer net selling and that the magnitude increases with the extent of officers’ net selling activity. In addition, audit fees are higher when the number of requests for Form 4 in the SEC EDGAR online system is higher. And audit fees are sensitive to the number of requests for both recent and historical Form 4. Collectively, these results suggest that auditors’ risk assessments are sensitive to information reflected in insider trading, consistent with regulatory requirements for auditors to consider non-traditional risk characteristics. In addition, our evidence suggests that auditors’ ability to process information reflected in insider trading activity is sophisticated.
Keywords: audit fees, audit risk assessment, insider trading, EDGAR
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