Internal control deficiencies and audit pricing: evidence from initial public offerings

Jong Eun Lee

Accounting and Finance, 2018, vol. 58, issue 4, 1201-1229

Abstract: Prior evidence on the association between internal control deficiencies and audit fees pertains to public companies. In this study, I investigate the association between internal control deficiencies identified in initial public offering (IPO) audits and audit fees, as well as which factors drive the association. I find that IPO firms with internal control deficiencies regarding pre‐IPO financial reporting are likely to pay higher IPO audit fees, which suggests that auditors adjust audit fees for the increased internal control risk. In addition, I find that the fees are positively and significantly associated with the severity of the type of deficiencies.

Date: 2018
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