Title: How audit fees are affected by a client under SEC investigation

Authors: Winifred D. Scott; Willie E. Gist

Addresses: College of Business, Zayed University, Dubai, United Arab Emirates ' School of Accountancy, College of Business, Ohio University Athens, Ohio 45701, USA

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.

Keywords: SEC investigations; regulatory agencies; business risk; engagement risk; cost consequence; audit risk; audit fees; monitoring costs; auditing; audit costs; Securities and Exchange Commission; USA; United States; client management; fee-related incentives; financial statements.

DOI: 10.1504/IJAAPE.2014.060209

International Journal of Accounting, Auditing and Performance Evaluation, 2014 Vol.10 No.2, pp.153 - 186

Received: 11 Dec 2012
Accepted: 19 Aug 2013

Published online: 17 May 2014 *

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