Indicators of audit fees and fraud classification: impact of SOX

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to compare the effect of corporate governance variables and fraud litigation on audit fees both before and after the implementation of the Sarbanes-Oxley (SOX) Act in 2002. Design/methodology/approach -The paper utilizes a sample of firms that had litigation proceedings filed against them for fraudulent financial reporting, and compare these firms to a sample of non-fraud firms in the pre-and post-SOX period. First, the authors examine indicators of audit fees using the Simunic model. Next, the authors develop a logistic regression model with corporate governance variables and other financial control variables in order to identify the characteristics of firms that are accused of fraud in the pre-and post-SOX period. Findings -The paper identifies specific components of corporate governance that are positively related to audit fees and which subsequently aid in classifying companies subject to fraud litigation. The most successful logistic regression model for 2005 (post-SOX) is 64.4 per cent accurate in distinguishing firms litigated for fraud, while the most successful model for 2001 (pre-SOX) is 61.4 per cent accurate in distinguishing such firms. Originality/value -The research design and findings assist in providing additional evidence about the association between the effectiveness of the corporate governance structure and the external auditor in assessing the risk of fraud.

Sarbanes-Oxley Act Early Effect: An Empirical Research Using Auditor Change Prediction Data Mining Approaches

“…The size variable is not significantly different since the control firms were matched based on size and industry. The qualified opinion, sales/total assets, growth (which is a similar measure to sales/total assets), and fee ratios are not significant as in previous empirical studies such as Krishnan et al (1996) and Lenard et al (2011).…”

“…Recently, Boland et al (2015) found empirically that misstatements in financial reporting decreased with the later SOX filers. This issue will be important for auditors preparing audit planning procedures if they can predict that some firms may need more rigorous auditing and assessment of their internal control system and may need to charge higher audit fees (Lenard, Petruska, Alam, & Yu, 2011). Investors may demand more reliable financial information for their portfolio after SOX.…”

“…Krishnan, and Stephens (1996) recognized that auditors are more likely to issue qualified audit opinions to firms that switch auditors. Lenard et al (2011) discovered that some components of corporate governance such as better governance and big N audit firms are related to audit fees and these factors are related to predicting fraud litigation after SOX. Kao, Li, and Zhang (2013) also found that Big 4 auditors handled client pressure well even before the SOX Act.…”

Internal Control Moderates the Influence of the Fraud Hexagon on Financial Statement Fraud

“…According to (Vousinas, 2019) fraud will be much more difficult to stop when it occurs due to collusion either between employees, or employees and external parties. Lenard, Petruska, Pervaiz, & Yu (2012) found that the company's audit fees were higher in the before-during-after years of fraud litigation compared to companies without fraud cases. Even an increase in audit fees occurs when the auditor must consider the compensation obtained by management in planning the audit because of the potential risk of fraud arising from equity incentives (Kannan, Skantz, & Higgs, 2014).…”

Elucidating corporate governance’s impact and role in countering fraud

“…Melis (2005) analysed Parmalat's fraud case and concluded the company did not have independent directors. Lenard et al (2012) provide evidence of the association between the corporate governance structure's effectiveness and the external auditor assessing fraud risk.…”