Auditors’ Fee Premiums and Low Quality Internal Controls

Posted: 1 Jul 2020

See all articles by Gil S. Bae

Gil S. Bae

Korea University - Department of Accounting

Seung Uk Choi

Korea University - Department of Accounting

Phillip T. Lamoreaux

Arizona State University

Jae Eun Lee

Hongik University - School of Business

Date Written: March 24, 2020

Abstract

We examine the relation between low quality internal controls and audit fee premiums. Using a novel dataset of audit hours and audit fees we find, consistent with the audit risk model, that auditors increase their effort (hours) due 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.

Keywords: Internal control, Audit fees, Auditor effort, Risk premium, Korea

JEL Classification: M4, M42

Suggested Citation

Bae, Gil Soo and Choi, Seung Uk and Lamoreaux, Phillip T. and Lee, Jae Eun, Auditors’ Fee Premiums and Low Quality Internal Controls (March 24, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3564505

Gil Soo Bae

Korea University - Department of Accounting ( email )

Seoul, 136-701
Korea

Seung Uk Choi

Korea University - Department of Accounting ( email )

Seoul, 136-701
Korea

Phillip T. Lamoreaux (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Jae Eun Lee

Hongik University - School of Business ( email )

72-1 Sangsu-Dong, Mapo-Gu
Seoul, 121-791
Korea, Republic of (South Korea)

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