Publication Type

Working Paper

Publication Date

12-2007

Abstract

The Section 404 of Sarbanes-Oxley Act (SOX) requires top management toestablish, maintain, and regularly evaluate the effectiveness of the internal controlover financial reporting (ICOFR), and obtain an auditor’s attestation. In this paper, weidentify 232 firms that received “Ineffective” audit opinion on the effectiveness ofICOFR due to one or more material weakness in internal control (WIC). We examinethe association between audit fees and the WIC for pre- and post-SOX period. Wefind that highly levered clients with the WIC paid greater audit fees even in the preSOXperiod and continuously paid the high fees in post-SOX period, whereas theloss-making clients with WIC paid higher fees only in post-SOX period. We also findevidence that the Big 4 auditors charged higher audit fees for firms with WIC,compared with the fee charged by non-Big 4 auditors for firms with WIC. Thesefindings suggest that auditors, in terms of their behaviours and pricing mechanism,responded to the legal liability environment changes caused by SOX.

Keywords

Internal Control, Audit services, Audit fees, Sarbanes-Oxley Act

Discipline

Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

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