How audit fees are affected by a client under SEC investigation

Winifred D. Scott and Willie E. Gist

International Journal of Accounting, Auditing and Performance Evaluation, 2014, vol. 10, issue 2, 153-186

Abstract: We examine the effect of a US Securities and Exchange Commission (SEC) investigation of the audit client on audit cost. Ordinary least-squares models along with a match-paired design and publicly available auditor fees data are used to analyse the relation between an SEC investigation event and audit fees. The finding of a positive and significant relation supports our hypothesis that the business risk of a client under investigation by this regulatory agency is perceived to be higher than that of a client not under investigation. This finding is important given that certain factors may work against observing an effect. This study contributes to the literature by determining that auditors charge a statistically and economically significant average audit fees premium that ranges from 49.9% to 56.2% to clients under SEC investigation. One implication is that client management has fee-related incentives to avoid regulatory misconduct/scrutiny and produce financial statements free of material misstatement.

Keywords: SEC investigations; regulatory agencies; business risk; engagement risk; cost consequence; audit risk; audit fees; monitoring costs; auditing; audit costs; Securities and Exchange Commission; USA; United States; client management; fee-related incentives; financial statements. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijaape:v:10:y:2014:i:2:p:153-186

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