Premium
Auditors' Fee Premiums and Low‐Quality Internal Controls *
Author(s) -
Bae Gil S.,
Choi Seung UK,
Lamoreaux Phillip T.,
Lee Jae Eun
Publication year - 2020
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12602
Subject(s) - endogeneity , business , audit , accounting , quality audit , control (management) , quality (philosophy) , internal audit , corporate governance , sample (material) , actuarial science , finance , economics , econometrics , philosophy , chemistry , management , epistemology , chromatography
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.