The Impact of Trade Secrecy Protection on Audit Pricing

Peng Gao, Karel Hrazdil (), Jiyuan Li and Jingjing Xia
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Peng Gao: School of Accounting, Chongqing University of Technology, Ba’nan District, Chongqing 400054, China
Karel Hrazdil: Beedie School of Business, Simon Fraser University, Burnaby, BC V5A 1S6, Canada
Jiyuan Li: School of Accounting, Chongqing University of Technology, Ba’nan District, Chongqing 400054, China
Jingjing Xia: College of Business & Public Management, Wenzhou-Kean University, Wenzhou 325015, China

IJFS, 2025, vol. 13, issue 4, 1-22

Abstract: Because auditors have access to corporate information, a firm’s decision to protect material trade secrets should, in principle, not influence audit effort. We analyze the effects of trade secrecy protection on the audit fees, documenting that firms with redacted information pay significantly higher fees than those that do not redact information. In cross-sectional tests, we further document that the relationship between redaction and audit fees is significantly influenced by both auditor and client characteristics. Consistent with the premise that redaction increases the complexity of the audit—particularly if auditors view redacted disclosures as indicators of potential business or litigation risk—the regression results indicate that the main effect is moderated by auditor factors such as specialization, tenure, and quality, as well as client factors like existing relationships, bargaining power, and reporting quality. These insights contribute to ongoing discussions in audit policy by illustrating how confidential disclosure practices affect audit effort and costs. Overall, our results inform policymakers seeking to reconcile firms’ proprietary information protection with public interest in transparent and credible financial reporting.

Keywords: confidential treatment; redaction; proprietary costs; engagement risk; audit fees (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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