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How audit fees are affected by a client under SEC investigation

Author

Listed:
  • Winifred D. Scott
  • Willie E. Gist

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.

Suggested Citation

  • Winifred D. Scott & Willie E. Gist, 2014. "How audit fees are affected by a client under SEC investigation," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 10(2), pages 153-186.
    • Handle: RePEc:ids:ijaape:v:10:y:2014:i:2:p:153-186
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