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Auditors' Fee Premiums and Low-Quality Internal Controls

Authors
Lee, Jae EunS.U.ChoiLamoreaux, P.T.Bae, G.S.
Issue Date
ACCEPT
Publisher
John Wiley and Sons Inc
Keywords
audit fees; auditor effort; internal control; Korea; risk premium
Citation
Contemporary Accounting Research, v.38, no.1, pp.586 - 620
Journal Title
Contemporary Accounting Research
Volume
38
Number
1
Start Page
586
End Page
620
URI
https://scholarworks.bwise.kr/hongik/handle/2020.sw.hongik/11401
DOI
10.1111/1911-3846.12602
ISSN
0823-9150
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. © CAAA
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