The Association between Audit Fees and Auditors' Opinions on Internal Control Weakness under Section 404 of the Sox

• Main Authors: Choi, Jong-Hag, Kim, Jeong-Bon, Kwon, Soo Young, Zang, Yoonseok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2007
• Subjects: Internal Control; Audit services; Audit fees; Sarbanes-Oxley Act; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research_smu/2; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1001&context=soa_research_smu
• Institution: Singapore Management University

The Section 404 of Sarbanes-Oxley Act (SOX) requires top management to establish, maintain, and regularly evaluate the effectiveness of the internal control over financial reporting (ICOFR), and obtain an auditor’s attestation. In this paper, we identify 232 firms that received “Ineffective” audit opinion on the effectiveness of ICOFR due to one or more material weakness in internal control (WIC). We examine the association between audit fees and the WIC for pre- and post-SOX period. We find that highly levered clients with the WIC paid greater audit fees even in the preSOX period and continuously paid the high fees in post-SOX period, whereas the loss-making clients with WIC paid higher fees only in post-SOX period. We also find evidence that the Big 4 auditors charged higher audit fees for firms with WIC, compared with the fee charged by non-Big 4 auditors for firms with WIC. These findings suggest that auditors, in terms of their behaviours and pricing mechanism, responded to the legal liability environment changes caused by SOX.