Auditors' Fee Premiums and Low-Quality Internal Controls*

Gil S. Bae, Seung U.K. Choi, Phillip T. Lamoreaux, Jae Eun Lee

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the relation between low-quality internal controls and audit fee premiums. Using a novel data set of audit hours and audit fees we find, consistent with the audit risk model, that auditors increase their effort (hours) owing to low internal control quality. We find that auditors also charge a significant fee premium to clients with internal control weaknesses. This premium is observed for severe internal control weaknesses and companies with low-quality alternative governance mechanisms. The results are robust to multiple methods to address endogeneity, including company fixed effects, difference-in-differences design, and a propensity score-matched sample. Taken as a whole, low internal control quality leads to fee premiums, which are a deadweight loss to client companies.

Original languageEnglish (US)
Pages (from-to)586-620
Number of pages35
JournalContemporary Accounting Research
Volume38
Issue number1
DOIs
StatePublished - Mar 1 2021

Keywords

  • Korea
  • audit fees
  • auditor effort
  • internal control
  • risk premium

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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