Internal Control Quality and Audit Pricing Under The Sarbanes-Oxley Act

38 Pages Posted: 6 Feb 2007

See all articles by Rani Hoitash

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Jean C. Bedard

Bentley University - Department of Accountancy

Date Written: 01/31/2007

Abstract

This paper extends prior research on audit risk adjustment by examining the association of audit pricing with internal control problems disclosed under Sections 404 and 302 of the Sarbanes-Oxley Act. While studies of auditors' responses to internal control risk provide mixed evidence, it is important to re-examine this issue using data on specific client problems not available prior to SOX. As a baseline, we first establish a strong association of audit fees with internal control problems disclosed in the first year of implementation of Section 404, consistent with prior research (e.g., Raghunandan and Rama 2006). We then address two issues on which prior results are contradictory. In a broadly-based sample of accelerated filers, we find that audit pricing for companies with internal control problems varies by problem severity, when severity is measured either as material weaknesses vs. significant deficiencies, or by nature of the problem. Also, while audit fees increase during the 404 period, our tests show less relative risk adjustment under Section 404 than under Section 302 in the prior year. Further examining intertemporal effects, we find that companies disclosing internal control problems under Section 302 continue to pay higher fees the following year, even if no problems are disclosed under Section 404. Overall, our findings provide detailed insight into audit risk adjustment during the initial period of SOX implementation.

Keywords: Internal control, Audit effort, Audit planning, Audit pricing

Suggested Citation

Hoitash, Rani and Hoitash, Udi and Bedard, Jean C., Internal Control Quality and Audit Pricing Under The Sarbanes-Oxley Act (01/31/2007). Available at SSRN: https://ssrn.com/abstract=960720 or http://dx.doi.org/10.2139/ssrn.960720

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Jean C. Bedard (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

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