Following Arthur Andersen’s conviction for obstructing justice, auditors faced a one-time significant change in their regulatory environment because it was clear that: (i) major audit partnerships could be closed; (ii) post SOX, regulators would take a far more attentive (aggressive) role. In response auditors considered whether the pricing of audits should be revised to take account of the increased risk of regulatory intervention and litigation. Obviously such re-pricing would need to be targeted at those firms for which the risks were greatest. One early warning signal of such events occurring is the issuance by the SEC of a Comment Letter. We investigate whether there is any evidence that if a client receives a Comment Letter this is used to re-price audit services. Specifically, we investigate whether issuance resulted in upward pressure on audit fees, and whether this effect was simply transient around the issuance period or alternatively persisted some years into the future. This research finds that after a client receives a Comment Letter, auditors adjust audit fees upwards in the period in which the Comment Letter is received. In addition it is shown that for subsequent periods in which the auditor does not spend time assisting the client respond to a specific Comment Letter, initial rises in audit fee persist. This is consistent with the hypothesis that auditors reassess the reputation and litigation risk of the client on the basis of the SEC issuance of a Comment Letter.

External auditor reassessment of client business risk following the issuance of a comment letter by the SEC

GIETZMANN, MILES BERNARD;PETTINICCHIO, ANGELA KATE
2014

Abstract

Following Arthur Andersen’s conviction for obstructing justice, auditors faced a one-time significant change in their regulatory environment because it was clear that: (i) major audit partnerships could be closed; (ii) post SOX, regulators would take a far more attentive (aggressive) role. In response auditors considered whether the pricing of audits should be revised to take account of the increased risk of regulatory intervention and litigation. Obviously such re-pricing would need to be targeted at those firms for which the risks were greatest. One early warning signal of such events occurring is the issuance by the SEC of a Comment Letter. We investigate whether there is any evidence that if a client receives a Comment Letter this is used to re-price audit services. Specifically, we investigate whether issuance resulted in upward pressure on audit fees, and whether this effect was simply transient around the issuance period or alternatively persisted some years into the future. This research finds that after a client receives a Comment Letter, auditors adjust audit fees upwards in the period in which the Comment Letter is received. In addition it is shown that for subsequent periods in which the auditor does not spend time assisting the client respond to a specific Comment Letter, initial rises in audit fee persist. This is consistent with the hypothesis that auditors reassess the reputation and litigation risk of the client on the basis of the SEC issuance of a Comment Letter.
2014
Gietzmann, MILES BERNARD; Pettinicchio, ANGELA KATE
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3980128
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