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THE ASSOCIATION BETWEEN FINANCIAL REPORTING RISK AND AUDIT FEES BEFORE AND AFTER THE HISTORIC EVENTS SURROUNDING SOX |
| Journal: | Journal of Accounting Research (view standing data) | | Volume: | 48 | | Issue: | 3 | | Month: | May | | Year: | 2010 | | Start Page: | 15 | | End Page: | 39 |
| Author(s): | Shannon L. Charles, Steven M. Glover, and Nathan Y. Sharp |
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This study investigates whether the association between financial reporting risk and audit fees changed during 2000–2003: a time period marked by momentous and historic events for auditors. We find a positive statistically and economically significant relationship between financial reporting risk and audit fees paid to Big 4 auditors. More importantly, we predict and find that the relation between financial reporting risk and audit fees strengthened significantly in 2002 and 2003, consistent with a shift in the way auditors priced risk, likely in response to the events surrounding the Sarbanes-Oxley Act of 2002. Finally, we provide evidence that a commercially developed, comprehensive risk measure effectively proxies for an element of risk beyond what has traditionally been captured by various risk measures in audit fee models: namely, the risk that financial statements have been intentionally misstated. We believe this risk measure will be of interest to future researchers.
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