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An International Meeting of American Accounting
Association
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Internal Control Quality and Audit Pricing Under the Sarbanes-Oxley Act |
Ran Hoitash
Suffolk University
Udi Hoitash
Rutgers University
Jean C. Bedard
Bentley College
Abstract: We examine the association of audit pricing with internal control problems disclosed under Sections 302 and 404 of the Sarbanes-Oxley Act. As a baseline, we establish a strong association of audit fees with internal control problems disclosed in the first year of Section 404 implementation. Additionally, we find that audit pricing for companies with internal control problems varies by problem type, but not by problem severity. Moreover, while audit fees increase during the 404 period, we find that the fee differential associated with disclosure of internal control problems under 404 is lower than the corresponding effect under 302, suggesting less risk adjustment in audit pricing during the 404 period. Further, companies disclosing internal control problems under 302 continue to pay higher fees the following year, even if no problems are disclosed under 404. Overall, our findings provide insight into audit risk adjustment during the initial period of SOX implementation.