Does insider trading affect auditors’ risk assessments and effort? Evidence from audit pricing

Farzana Afrin, Sabrina Chi, Jiwon Nam and Jaclyn D. Prentice

Managerial Auditing Journal, 2026, vol. 41, issue 5, 814-837

Abstract: PurposeAudit regulations suggest that auditors consider insider trading as part of their assessment of and response to the risk of material misstatement as insider trading provides information about audit-relevant outcomes such as weak internal controls and fraud. The authors investigate whether audit fees reflect the increased risk revealed and more audit effort induced by insider selling.Design/methodology/approachThis study uses empirical analysis with OLS.FindingsThe authors find that relative to companies with net insider buying, audit fees are higher among companies with net insider selling, especially when the insiders are officers. In addition, the authors find more audit effort is needed when a large, accelerated filer changes to a net insider seller. We further find that the value of total insider purchase is negatively related to audit fees among companies of net insider buying.Originality/valueCollectively, the findings suggest that auditors’ risk assessments and effort are sensitive to information reflected in insider trading, consistent with regulatory recommendations for auditors to consider nontraditional risk characteristics.

Keywords: Audit fees; Audit risk assessment; Insider trading; Audit pricing; Audit effort (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-01-2025-4667

DOI: 10.1108/MAJ-01-2025-4667

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