Unexpected fees and the prediction of material weaknesses in internal control over financial reporting

Susan M. Albring, Randal Elder, Xiaolu Xu

Research output: Contribution to journalArticle

2 Scopus citations

Abstract

We investigate whether prior year unexpected audit fees help predict new material weaknesses in internal control over financial reporting reported under Section 404 of the Sarbanes-Oxley Act (SOX). Predicting material weaknesses may be useful to investors and other financial statement users because these disclosures have adverse economic impacts on disclosing firms. Unexpected fees are significantly associated with material weaknesses reported under Section 404, even after controlling for Section 302 disclosures and other factors associated with internal control weaknesses. Unexpected fees are associated with company-level weaknesses but are not significantly associated with account-specific weaknesses, consistent with differences in the nature and severity of the two types of material weaknesses. Our results are consistent with unexpected audit fees containing information on unobserved audit costs and client control risks, which help predict future internal control weaknesses.

Original languageEnglish (US)
Pages (from-to)485-505
Number of pages21
JournalJournal of Accounting, Auditing and Finance
Volume33
Issue number4
DOIs
StatePublished - Jan 1 2018

Keywords

  • Internal control weaknesses
  • Section 302
  • Section 404
  • Unexpected fees

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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