The Association between Financial Reporting Risk and Audit Fees before and after the Historic Events Surrounding SOX Academic Article uri icon

abstract

  • SUMMARY: This study investigates whether the association between financial reporting risk and audit fees changed during 20002003: a time period marked by momentous and historic events for auditors. We find a positive statistically and economically significant relationship between financial reporting risk and audit fees paid to Big 4 auditors. More importantly, we predict and find that the relation between financial reporting risk and audit fees strengthened significantly in 2002 and 2003, consistent with a shift in the way auditors priced risk, likely in response to the events surrounding the Sarbanes-Oxley Act of 2002. Finally, we provide evidence that a commercially developed, comprehensive risk measure effectively proxies for an element of risk beyond what has traditionally been captured by various risk measures in audit fee models: namely, the risk that financial statements have been intentionally misstated. We believe this risk measure will be of interest to future researchers.

published proceedings

  • AUDITING-A JOURNAL OF PRACTICE & THEORY

author list (cited authors)

  • Charles, S. L., Glover, S. M., & Sharp, N. Y.

citation count

  • 97

complete list of authors

  • Charles, Shannon L||Glover, Steven M||Sharp, Nathan Y

publication date

  • January 2010