Misclassification of audit-related fees as a measure of internal control quality

William Buslepp, Joseph Legoria, Regina Rosa and Dan Shaw

Advances in accounting, 2019, vol. 46, issue C, -

Abstract: There is an abundance of literature examining the effects of a poor internal control system on financial reporting quality, decision-making and auditing. However, the most commonly used proxy for internal control quality (i.e., a material weakness in the internal controls over financial reporting) occurs relatively infrequently and has declined in occurrence over the past decade (Chasan, 2013). In this study, we attempt to develop an alternative measure for internal control quality using the information reported in the SK portion of a firm's 10-K. We suggest that a misclassification of audit-related fees in the unaudited disclosures of the annual report is a proxy for low internal control quality. Consistent with lower internal control quality, we find that firms misclassifying audit-related fees are more likely to report a material weakness, are less timely filers (longer report lag) and pay higher audit fees. Our findings suggest that misclassification of audit-related fees correlate with having poor internal control quality.

Keywords: Mergers and acquisitions; Audit-related fees; Internal control quality; Financial reporting quality (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:46:y:2019:i:c:013

DOI: 10.1016/j.adiac.2019.100425

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