IDEAS home Printed from https://ideas.repec.org/a/eee/advacc/v46y2019ic013.html
   My bibliography  Save this article

Misclassification of audit-related fees as a measure of internal control quality

Author

Listed:
  • Buslepp, William
  • Legoria, Joseph
  • Rosa, Regina
  • Shaw, Dan

Abstract

There is an abundance of literature examining the effects of a poor internal control system on financial reporting quality, decision-making and auditing. However, the most commonly used proxy for internal control quality (i.e., a material weakness in the internal controls over financial reporting) occurs relatively infrequently and has declined in occurrence over the past decade (Chasan, 2013). In this study, we attempt to develop an alternative measure for internal control quality using the information reported in the SK portion of a firm's 10-K. We suggest that a misclassification of audit-related fees in the unaudited disclosures of the annual report is a proxy for low internal control quality. Consistent with lower internal control quality, we find that firms misclassifying audit-related fees are more likely to report a material weakness, are less timely filers (longer report lag) and pay higher audit fees. Our findings suggest that misclassification of audit-related fees correlate with having poor internal control quality.

Suggested Citation

  • Buslepp, William & Legoria, Joseph & Rosa, Regina & Shaw, Dan, 2019. "Misclassification of audit-related fees as a measure of internal control quality," Advances in accounting, Elsevier, vol. 46(C), pages 1-1.
    • Handle: RePEc:eee:advacc:v:46:y:2019:i:c:013
    DOI: 10.1016/j.adiac.2019.100425
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0882611018301962
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.adiac.2019.100425?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jeffrey S. Paterson & Adrian Valencia, 2011. "The Effects of Recurring and Nonrecurring Tax, Audit†Related, and Other Nonaudit Services on Auditor Independence," Contemporary Accounting Research, John Wiley & Sons, vol. 28(5), pages 1510-1536, December.
    2. Li, Chan & Sun, Lili & Ettredge, Michael, 2010. "Financial executive qualifications, financial executive turnover, and adverse SOX 404 opinions," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 93-110, May.
    3. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    4. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    5. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 193-223, September.
    6. Rani Hoitash & Udi Hoitash & Karla M. Johnstone, 2012. "Internal Control Material Weaknesses and CFO Compensation," Contemporary Accounting Research, John Wiley & Sons, vol. 29(3), pages 768-803, September.
    7. Cheng, Mei & Dhaliwal, Dan & Zhang, Yuan, 2013. "Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 1-18.
    8. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & Kinney Jr., William R., 2007. "The discovery and reporting of internal control deficiencies prior to SOX-mandated audits," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 166-192, September.
    9. Bin N. Srinidhi & Ferdinand A. Gul, 2007. "The Differential Effects of Auditors' Nonaudit and Audit Fees on Accrual Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 595-629, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adrian-Cosmin Caraiman, 2020. "Responsibility for Internal Control in Corporate Governance," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 612-618, December.
    2. Elsayed, Mohamed & Elshandidy, Tamer, 2021. "Internal control effectiveness, textual risk disclosure, and their usefulness: U.S. evidence," Advances in accounting, Elsevier, vol. 53(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Chen, Yu & Eshleman, John Daniel & Soileau, Jared S., 2016. "Board Gender Diversity and Internal Control Weaknesses," Advances in accounting, Elsevier, vol. 33(C), pages 11-19.
    3. Su, Lixin (Nancy) & Zhao, Xuezhou (Rachel) & Zhou, Gaoguang (Stephen), 2014. "Do customers respond to the disclosure of internal control weakness?," Journal of Business Research, Elsevier, vol. 67(7), pages 1508-1518.
    4. Sean T. McGuire & Stevanie S. Neuman & Sarah C. Rice, 2020. "Interim Effective Tax Rate Estimates and Internal Control Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 603-633, March.
    5. Baolei Qi & Liuchuang Li & Qing Zhou & Jinghui Sun, 2017. "Does internal control over financial reporting really alleviate agency conflicts?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1101-1125, December.
    6. Inder K. Khurana & Hoyoun Kyung, 2021. "Internal control material weakness and CEO recruitment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1940-1987, October.
    7. Lenard, Mary Jane & Petruska, Karin A. & Alam, Pervaiz & Yu, Bing, 2016. "Internal control weaknesses and evidence of real activities manipulation," Advances in accounting, Elsevier, vol. 33(C), pages 47-58.
    8. Shi, Wei & Wang, Rencheng, 2012. "Dynamic internal control performance over financial reporting and external financing," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(2), pages 92-109.
    9. Legoria, Joseph & Rosa, Gina & Soileau, Jared S., 2017. "Audit quality across non-audit service fee benchmarks: Evidence from material weakness opinions," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 97-108.
    10. Beng Wee Goh & Jayanthi Krishnan & Dan Li, 2013. "Auditor Reporting under Section 404: The Association between the Internal Control and Going Concern Audit Opinions," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 970-995, September.
    11. Ranjan D’Mello & Xinghua Gao & Yonghong Jia, 2017. "Internal control and internal capital allocation: evidence from internal capital markets of multi-segment firms," Review of Accounting Studies, Springer, vol. 22(1), pages 251-287, March.
    12. Stoel, M. Dale & Muhanna, Waleed A., 2011. "IT internal control weaknesses and firm performance: An organizational liability lens," International Journal of Accounting Information Systems, Elsevier, vol. 12(4), pages 280-304.
    13. Douglas Cumming & Lars Helge Hass & Linda A. Myers & Monika Tarsalewska, 2023. "Does Venture Capital Backing Improve Disclosure Controls and Procedures? Evidence from Management’s Post-IPO Disclosures," Journal of Business Ethics, Springer, vol. 187(3), pages 539-563, October.
    14. Wen-Wen Chien & Roger W. Mayer & John T. Sennetti, 2010. "Audit Committee Effectiveness In The Largest Us Public Hospitals: An Empirical Study," Accounting & Taxation, The Institute for Business and Finance Research, vol. 2(1), pages 107-127.
    15. Gopal V. Krishnan & Emma‐Riikka Myllymäki & Neerav Nagar, 2021. "Does financial reporting quality vary across firm life cycle?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 954-987, May.
    16. Philip Beaulieu & Louise Hayes & Lev M. Timoshenko, 2023. "Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 622-659, March.
    17. Shelagh Campbell & Yingqi Li & Junli Yu & Zhou Zhang, 2016. "The Impact of Occupational Community on the Quality of Internal Control," Journal of Business Ethics, Springer, vol. 139(2), pages 271-285, December.
    18. Li, Yuanhui & Li, Xiao & Xiang, Erwei & Geri Djajadikerta, Hadrian, 2020. "Financial distress, internal control, and earnings management: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    19. Leone, Andrew J., 2007. "Factors related to internal control disclosure: A discussion of Ashbaugh, Collins, and Kinney (2007) and Doyle, Ge, and McVay (2007)," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 224-237, September.
    20. Chychyla, Roman & Leone, Andrew J. & Minutti-Meza, Miguel, 2019. "Complexity of financial reporting standards and accounting expertise," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 226-253.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:advacc:v:46:y:2019:i:c:013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/advances-in-accounting/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.