scholarly journals Evidence on the Impact of Internal Control over Financial Reporting on Audit Fees

2019 ◽  
Vol 9 (3) ◽  
pp. 1
Author(s):  
Mohamed Gaber ◽  
Samy Garas ◽  
Edward J. Lusk
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Public Information ◽  
Audit Fees ◽  
Stock Trading ◽  
Audit Opinion ◽  
The Public ◽  
Public Company ◽  
Effective Group ◽  
The Impact

Introduction: Circa 1992, the dot.com sector created an irrational stock-trading market where the usual “financial” profiles of: Liquidity, Cash Flow from Operations, and Revenue generation were replaced by Ponzi-esque mayhem. To stabilize the markets, the Public Company Accounting Oversight Board [PCAOB] required a second audit opinion: the COSO Opinion on the adequacy of management’s system of Internal Control over Financial Reporting: [ICoFR].Study Focus: Three COSO-[ICoFR] designations are now required as public information: (i) A “clean” opinion [Is Effective], (ii) Deficiencies are noted, and (iii) Weaknesses reported. Our research interest is to determine, for a panel of randomly selected firms traded on the S&P500 for a eleven-year period: 2005 to 2015, the nature of the effect that the COSO deficiency reporting protocol has on (i) Audit Fees and (ii) the Market Cap of traded firms.Method: To this end we collected, using the Audit Analytics Ô[WRDSÔ] database, various categories of reported Audit Fees and also Market Cap information. This random sample was classified into two sets: the first group: Is Effective SEC 302 Designation and No COSO issues & the second group: Is Not 100% Effective for which there were SEC 302 Deficiencies or Weaknesses noted.Results: Inferential testing indicates that failure to attend to the PCAOB-COSO imperatives results in a relational where there are higher Audit Fees and a slippage of the firm’s Market Cap compared to the Is Effective Group. The PCAOB’s protocol to require the Audit of the firm’s ICoFR system and make that evaluation public information seems to be an excellent corrective “Carrot and Stick”.

The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality

2012 ◽  
Vol 26 (3) ◽  
pp. 493-511 ◽  
Author(s):  
Dechun Wang ◽  
Jian Zhou
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Test Sample ◽  
Large Sample ◽  
The Public ◽  
Public Company ◽  
The Impact ◽  
Jel Classifications

SYNOPSIS We investigate the impact of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS5) on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. Using a large sample of accelerated filers subject to AS5, we find evidence that audit fees decrease upon the adoption of AS5. More importantly, even though AS5 adoption reduces audit fees for our test sample, we find no evidence of a decrease in audit quality. In summary, we document evidence that AS5 improves the efficiency of internal control audits. JEL Classifications: M41.

Controls, Security, and Audit in Online Digital Accounting

2011 ◽  
pp. 318-383
Author(s):  
Ashutosh Deshmukh
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Annual Report ◽  
Control Structure ◽  
Internal Controls ◽  
Section 404 ◽  
Checks And Balances ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Company

Internal controls have existed since the dawn of business activities. Internal controls are basically systems of checks and balances. The purpose is to keep the organization moving along desired lines as per the wishes of the owners and to protect assets of the business. Internal controls have received attention from auditors, managers, accountants, fraud examiners and legislatures. Sarbanes Oxley Act 2002 now requires the annual report of a public company to contain a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management’s assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting. Section 404 of the Act also requires the auditor to attest to and report on management’s assessment of effectiveness of the internal controls in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

Auditors' Internal Control over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions

2012 ◽  
Vol 32 (Supplement 1) ◽  
pp. 131-166 ◽  
Author(s):  
Stephen K. Asare ◽  
Brian C. Fitzgerald ◽  
Lynford E. Graham ◽  
Jennifer R. Joe ◽  
Eric M. Negangard ◽  
...  
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Future Research ◽  
The Public ◽  
Road Map ◽  
Sarbanes Oxley ◽  
Environmental Attributes ◽  
Public Company ◽  
Reporting Decisions ◽  
Five Phases

SUMMARY We synthesize the literature on auditors' evaluation of, and reporting on, internal control over financial reporting (ICOFR), as required by the Sarbanes-Oxley Act. The purpose of the synthesis is (1) to provide information on how and how well auditors perform the task, which serves as feedback to the Public Company Accounting Oversight Board on implementation issues and problems related to auditors' application of the professional standards on ICOFR; and (2) to identify gaps in the current literature and fruitful areas of future research. Consistent with Auditing Standard No. 5, we delineate five phases of the ICOFR audit: (1) planning; (2) scoping; (3) testing; (4) evaluation; and (5) reporting. We structure our synthesis using a framework that classifies the determinants of performance in each phase into five broad areas: (a) the auditor's attributes, (b) the client's attributes, (c) the interaction between the auditor and the client, (d) task attributes, and (e) environmental attributes. Key contributions include providing an ICOFR tasks taxonomy, proposing a model of the determinants of performance for each task, evaluating auditors' performance of the tasks in our taxonomy, highlighting findings and gaps of importance to regulators, and providing a road map for future research.

Information Technology Controls Quality and Audit Fees: Evidence From Italy

2016 ◽  
Vol 33 (1) ◽  
pp. 123-146 ◽  
Author(s):  
Tatiana Mazza ◽  
Stefano Azzali
Keyword(s):  
Risk Assessment ◽  
Information Technology ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Listed Companies ◽  
Audit Risk ◽  
The Impact ◽  
Control Risk

This study analyzes the impact of Information Technology (IT) Controls quality on control risk and audit fees. The impact is expected to occur when regulation increases sensitiveness to audit risk assessment. The research focuses on IT Controls as part of Internal Control over Financial Reporting, particularly on scoping quality, segregation of duties, and Controls framework compliance. The research was conducted with a questionnaire on a population of Italian listed companies. We find that audit fees are lower for higher IT scoping quality, IT Controls segregation of duties, and IT Controls framework compliance. The overall conclusion is that IT Controls quality is related to lower control risk, audit fees, and audit effort.

Boardroom Backscratching and Audit Fees

2018 ◽  
Vol 38 (2) ◽  
pp. 179-206 ◽  
Author(s):  
Dean Hanlon ◽  
Mehdi Khedmati ◽  
Edwin KiaYang Lim
Keyword(s):  
Financial Reporting ◽  
Policy Development ◽  
Audit Committee ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Risk Premiums ◽  
Audit Opinion ◽  
Future Performance ◽  
The Impact

SUMMARY This study investigates the impact of backscratching between the CEO and directors on a firm's future performance, financial reporting quality, and audit fees. We find that the presence and extent of boardroom backscratching are associated with weaker future performance, poorer quality financial reporting, and higher audit fees. We attribute these findings to backscratching firms' increased business and information risks inducing auditors to exert greater effort and charge risk premiums in response to heightened audit engagement risks. We observe consistent results when extending our investigation to backscratching between the CEO and audit committee and between the CEO and the CFO, given that the audit committee and the CFO influence financial reporting quality. Finally, we provide evidence that backscratching firms display greater audit report lag and a higher likelihood of receiving a going concern audit opinion. Our study offers insights to regulators concerning policy development to strengthen board effectiveness and remuneration disclosures.

The Impact of CEO and CFO Equity Incentives on Audit Scope and Perceived Risks as Revealed Through Audit Fees

2014 ◽  
Vol 33 (2) ◽  
pp. 111-139 ◽  
Author(s):  
Yezen H. Kannan ◽  
Terrance R. Skantz ◽  
Julia L. Higgs
Keyword(s):  
Executive Compensation ◽  
Positive Association ◽  
Audit Fees ◽  
Share Price ◽  
The Public ◽  
Audit Planning ◽  
Fraud Risk ◽  
Equity Incentives ◽  
Public Company ◽  
The Impact

SUMMARY: In 2013, the Public Company Accounting Oversight Board (PCAOB) proposed an amendment to Auditing Standard No. 12 (PCAOB 2010) that would require auditors to consider executive compensation in audit planning because of potential fraud risk associated with equity incentives. We use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase. Equity incentives are defined as the sensitivity of the value of executives' equity portfolios to changes in share price (delta incentive) and to changes in return volatility (vega incentive). We find a positive association between audit fees and vega, but not delta. However, when we interact vega with proxies for residual auditor business risk, we find that the fee premiums for risk decrease as vega increases. Our results suggest that auditors do consider executive compensation in audit planning.

scholarly journals Audit Partners' Judgments and Challenges in the Audits of Internal Control over Financial Reporting

2020 ◽  
Vol 39 (4) ◽  
pp. 57-85
Author(s):  
Jeffrey R. Cohen ◽  
Jennifer R. Joe ◽  
Jay C. Thibodeau ◽  
Gregory M. Trompeter
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Data Availability ◽  
Audit Committees ◽  
Structured Interviews ◽  
Material Weakness ◽  
The Public ◽  
National Office ◽  
Evaluation Task ◽  
Public Company

SUMMARY Internal control over financial reporting (ICFR) audits have been the subject of intensive examination by the Public Company Accounting Oversight Board (PCAOB) and researchers but the process through which auditors make ICFR judgments is largely a “black box.” To understand ICFR judgments, we conducted semi-structured interviews with 20 audit partners. Common themes in our interviews suggest that the subjectivity inherent in the ICFR evaluation task contributes to resistance against ICFR audit findings and cougnterarguments from management. Moreover, auditors perceive that their judgments are being second-guessed by PCAOB inspectors. Auditors believe that managers have difficulty accepting that material weaknesses can exist without a detected error, that management's reflexive reaction is to deny/avoid a material weakness finding, and managers routinely claim that management review controls (MRCs) would have caught the detected control deficiency. Auditors cope with management's defenses by consulting with their national office and leveraging support from strong audit committees. Data Availability: Requests for the data should be accompanied by a description of intended uses.

The Effect of Auditing Standard No. 5 on Audit Report Lags

2015 ◽  
Vol 29 (3) ◽  
pp. 507-527 ◽  
Author(s):  
Santanu Mitra ◽  
Hakjoon Song ◽  
Joon Sun Yang
Keyword(s):  
Internal Control ◽  
Extended Period ◽  
Data Availability ◽  
Audit Report ◽  
Audit Process ◽  
Top Down ◽  
The Public ◽  
Audit Efficiency ◽  
Public Company ◽  
The Impact

SYNOPSIS Auditing Standard No. 5 (AS5) introduced by the Public Company Accounting Oversight Board (PCAOB) in June 2007 requires a top-down risk-based approach in auditing and is expected to improve audit efficiency and make the overall auditing process timelier by reducing audit report lags. We investigate the impact of AS5 on audit report lags over an extended period from 2006 to 2011 and find that audit report lags are lower in the AS5 years (2007–2011) relative to the AS2 years (2006–2007). But this reduction is evident mostly for the firms with clean SOX 404 opinions. The presence of material internal control weaknesses (ICW) significantly increases audit report lags, but AS5 does not have any incremental moderating effect on report lags and the ICW relationship. Tests for the firms with company-level and account-specific ICWs demonstrate identical results. Additional analyses show that the learning curve effect takes place rapidly in the early part of the AS5 period and audits continue to remain efficient in terms of reduced report lags in the latter part of the AS5 period relative to the AS2 period. The year-to-year change analyses for the AS5 period further corroborate this result. Overall, our study demonstrates that the top-down, risk-based approach under AS5 makes the audit process more efficient and timelier by decreasing audit report lags. Data Availability: Data are available from public sources identified in the paper.

The Effect of Auditing Standard No. 5 on Audit Fees

2011 ◽  
Vol 30 (4) ◽  
pp. 1-27 ◽  
Author(s):  
Jagan Krishnan ◽  
Jayanthi Krishnan ◽  
Hakjoon Song
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Cost Savings ◽  
Audit Fees ◽  
Audit Efficiency ◽  
Material Weaknesses ◽  
Audit Fee ◽  
The Impact ◽  
First Time ◽  
General Reduction

SUMMARY In June 2007, the PCAOB issued Auditing Standard No. 5 (AS5), superseding Auditing Standard No. 2 (AS2). AS5 significantly changed the rules relating to audits of internal control over financial reporting (ICFR). Policymakers expected AS5 to lead to improvements in audit efficiency and thus a general reduction in audit costs, and specifically a reduction in fees for smaller and less complex companies that were disproportionately affected by AS2. We investigate the impact of the change from AS2 to AS5 on audit fees. We restrict our analysis to stable client-auditor combinations to ensure that auditors had prior AS2 experience with the client before the transition to AS5. We find that, after controlling for other factors, audit fees were lower in the first two years of implementation of AS5 relative to the last year of AS2. The decrease in fees was the highest for companies that had remediated material weaknesses in their internal control and thus moved from an adverse opinion under AS2 to a clean opinion under AS5. Further, firms that received first-time adverse opinions on their internal control in the AS5 period paid lower fee premiums (relative to firms with clean opinions) than did firms with adverse reports in the last AS2 year. Finally, in contrast to policymakers' expectations that AS5 would generate cost savings by allowing the ICFR audits to be “scaled” for small and less complex firms, there is no evidence that the smallest firms benefited. Specifically, audit fee savings were found only for relatively more complex firms (measured by multiple segments and international operations).

IT Does Matter: The Folly of Ignoring IT Material Weaknesses

2018 ◽  
Vol 32 (2) ◽  
pp. 37-55 ◽  
Author(s):  
Gene Kim ◽  
Vernon J. Richardson ◽  
Marcia Weidenmier Watson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Impact ◽  
Earnings Quality ◽  
Audit Fees ◽  
Data Availability ◽  
The Public ◽  
Material Weaknesses ◽  
Reporting Systems ◽  
Internal Control Weaknesses

SYNOPSIS Information technology (IT) has a large and growing impact on firms and executives. While there are questions about the ability of IT to create a competitive advantage, we make the case that ignoring IT may be to an organization's and its executives' peril. Using the lens of internal control issues associated with financial reporting systems, we illustrate how internal control weaknesses associated with IT (ITMWs) can have both a dramatic and negative impact on the firm and its leadership. ITMWs take longer to remediate; are associated with more subsequent restatements, less accurate forecasts, higher audit fees, and lower earnings quality; and are more likely associated with executives losing their positions than non-ITMWs. We argue that ITMW remediation requires more time to plan, rewrite, and implement IT changes than to implement non-IT changes. Extant literature suggests that executives should focus their efforts on IT vulnerabilities and risks rather than IT opportunities. Data Availability: Data are available from the public sources cited in the text.

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