SHERP

The Effect of Internal Control Weakness Under Section 404 of the Sarbanes-Oxley Act on Audit Fees

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Authors
CHOI, JONG-HAG; KIM, JEONG-BON; KWON, SOO YOUNG; ZANG, YOONSEOK
Issue Date
2010-06
Publisher
College of Business Administration (경영대학)
Citation
Seoul Journal of Business, Vol.16(1): 1~44
Keywords
Internal controlAudit feesLegal liabilitySarbanes-Oxley Act
Abstract
In this paper, we investigate the effect of the enactment of the Sarbanes-
Oxley Act (SOX) in 2002 on audit pricing, using a sample of 252 firms that received an “Ineffective” audit opinion and other firms that received clean
audit opinion on the effectiveness of the internal control over financial reporting
under Section 404 of SOX. Our analyses show the following. First,
we find that auditors charge significantly higher audit fees for all firms in
the post-SOX period than in the pre-SOX period. Second, we find that auditors’
opinions on the weakness in internal control (WIC) are positively associated
with audit fees, and that the positive association between the two
is pronounced primarily in the post-SOX period, but not in the pre-SOX
period. Third, we find that clients with WIC problems that are highly levered
and/or report losses pay incrementally higher audit fees during the post-
SOX period. We also find that Big 4 audit fee premiums increase significantly
for all clients during the post-SOX period, regardless of whether the
clients have WIC or not. Overall, our results suggest that auditors, in terms
of their behavior and pricing mechanism, responded to an upward shift in
the strength of the legal liability regime caused by the SOX enactment.
ISSN
1226-9816
Language
English
URI
http://hdl.handle.net/10371/75572
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 16, Number 1/2 (2010)
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