Title: Internal control deficiencies, investment opportunities, and audit fees
Authors: M. Akhtaruddin; Jonathan Ohn
Institute of Business Administration, University of Rajshahi, Rajshahi, Bangladesh
Department of Finance, Bloomsburg University of Pennsylvania, Bloomsburg, PA 17815, USA
Abstract: While earlier studies examine the impact of firm-specific characteristics on audit fees, no study has, to our knowledge, examined the relation between internal control deficiencies, investment opportunity, and audit fees. In this paper, we investigate the relation between investment opportunities, internal control deficiencies, and audit fees, after the enactment of the Sarbanes-Oxley (SOX) Act. Using a sample of 194 firms with the SOX compliant and non-compliant firms listed on the US stock exchanges, our analysis documents that higher audit fees are more likely for firms that have internal control deficiencies or higher growth opportunity. The evidence suggests that increased audit fees indicate an additional cost that firms should bear when their perceived risk is high to auditors when the business is growing and internal control mechanism is reported weak. However, the presence of higher number of independent directors on the board may signal that the organisation is struggling to mitigate the incidence of audit costs.
Keywords: internal control deficiencies; investment opportunities; audit fees; Sarbanes-Oxley Act; SOX; USA; United States; perceived risk.
Int. J. of Accounting and Finance, 2016 Vol.6, No.2, pp.127 - 144
Date of acceptance: 28 Jan 2016
Available online: 09 Sep 2016