Publication Type
Working Paper
Publication Date
12-2007
Abstract
The Section 404 of Sarbanes-Oxley Act (SOX) requires top management to establish, maintain, and regularly evaluate the effectiveness of the internal control over financial reporting (ICOFR), and obtain an auditor’s attestation. In this paper, we identify 232 firms that received “Ineffective” audit opinion on the effectiveness of ICOFR due to one or more material weakness in internal control (WIC). We examine the association between audit fees and the WIC for pre- and post-SOX period. We find that highly levered clients with the WIC paid greater audit fees even in the preSOX period and continuously paid the high fees in post-SOX period, whereas the loss-making clients with WIC paid higher fees only in post-SOX period. We also find evidence 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. These findings 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
Citation
Choi, Jong-Hag; Kim, Jeong-Bon; Kwon, Soo Young; and Zang, Yoonseok.
The Association between Audit Fees and Auditors' Opinions on Internal Control Weakness under Section 404 of the Sox. (2007).
Available at: https://ink.library.smu.edu.sg/soa_research_smu/2
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.