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Auditors' Fee Premiums and Low‐Quality Internal Controls

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  • Gil S. Bae
  • Seung UK Choi
  • Phillip T. Lamoreaux
  • Jae Eun Lee

Abstract

We examine the relation between low‐quality internal controls and audit fee premiums. Using a novel data set of audit hours and audit fees we find, consistent with the audit risk model, that auditors increase their effort (hours) owing to low internal control quality. We find that auditors also charge a significant fee premium to clients with internal control weaknesses. This premium is observed for severe internal control weaknesses and companies with low‐quality alternative governance mechanisms. The results are robust to multiple methods to address endogeneity, including company fixed effects, difference‐in‐differences design, and a propensity score‐matched sample. Taken as a whole, low internal control quality leads to fee premiums, which are a deadweight loss to client companies. Majoration des honoraires des auditeurs et contrôles internes de faible qualité Nous examinons la relation entre les contrôles internes de faible qualité et la majoration des honoraires pour les audits. À l'aide d'un nouvel ensemble de données sur les heures consacrées en audit et les honoraires des auditeurs, nous constatons que, conformément au modèle de risque d'audit, les auditeurs travaillent davantage (nombre d'heures) lorsque la qualité des contrôles internes est faible. Nous établissons que les auditeurs majorent aussi considérablement leurs honoraires lorsque les clients présentent des faiblesses sur le plan du contrôle interne. Cette majoration s'observe en présence de graves faiblesses de contrôle interne et chez des entreprises dotées d'autres mécanismes de gouvernance de faible qualité. Les résultats sont robustes pour bon nombre de méthodes visant à contrôler l'endogénéité, dont les effets fixes de l'entreprise, la conception de l’écart dans les différences et l'utilisation d'un échantillon avec appariement sur score de propension. Dans son ensemble, la faible qualité des contrôles internes entraîne la majoration des honoraires, ce qui représente des dépenses improductives pour les entreprises clientes.

Suggested Citation

  • Gil S. Bae & Seung UK Choi & Phillip T. Lamoreaux & Jae Eun Lee, 2021. "Auditors' Fee Premiums and Low‐Quality Internal Controls," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 586-620, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:586-620
    DOI: 10.1111/1911-3846.12602
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    4. Tharindra Ranasinghe & Lin Yi & Ling Zhou, 2023. "Do auditors charge a client business risk premium? Evidence from audit fees and derivative hedging in the U.S. oil and gas industry," Review of Accounting Studies, Springer, vol. 28(2), pages 1107-1139, June.

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