Do Auditors Price Breach Risk in Their Audit Fees?

52 Pages Posted: 28 Aug 2018

See all articles by Thomas Joseph Smith

Thomas Joseph Smith

University of South Florida

Julia L. Higgs

Florida Atlantic University - School of Accounting

Robert E. Pinsker

Florida Atlantic University

Date Written: July 20, 2018

Abstract

Data security breaches have been shown in the literature to negatively affect firm operations. Auditors serve as an important, external governance mechanism with respect to a firm’s overall risk management protocol. Consequently, our study examines whether auditors price breach risk into their fees and if a firm’s internal governance can mitigate the potential increases in audit fees. Using a sample of breached firms ranging from 2005-2014, we adapt Houston et al.’s (2005) model to explore how auditors view audit risk related to breach risk. We find that breaches are associated with an increase in fees, but the result is driven by external breaches. Our evidence suggests the presence of board-level risk committees and more active audit committees may help mitigate the breach risk audit fee premium. Additional evidence suggests that both past breach disclosures as well as future disclosures are associated with audit fees.

Keywords: breach risk, audit fees, corporate governance, cybersecurity

Suggested Citation

Smith, Thomas Joseph and Higgs, Julia L. and Pinsker, Robert E., Do Auditors Price Breach Risk in Their Audit Fees? (July 20, 2018). Journal of Information Systems, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3234312

Thomas Joseph Smith (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Julia L. Higgs

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Fort Lauderdale, FL 33301
United States

Robert E. Pinsker

Florida Atlantic University ( email )

Boca Raton, FL 33431
United States

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