SEC enforcement releases and audit fees

Abstract

Purpose

The purpose of this study is to examine whether firms subject to an SEC enforcement action experience audit fee premiums in subsequent years.

Design/methodology/approach

The paper uses a test sample with firms that are cited in Accounting and Auditing Enforcement Releases (AAERs) by the US Securities and Exchange Commission (SEC) and two different control samples, and conducts empirical tests using cross‐sectional multiple regressions.

Findings

It is found that firms subject to SEC enforcement actions pay higher audit fees in subsequent periods. This finding is robust after controlling for restatements and prior material internal control weakness disclosures. Additional analyses show that executive turnover does not mitigate the audit fee premium.

Research limitations/implications

This study relies on AAERs; hence, the test sample is limited by the SEC's investigation selection procedures.

Practical implications

Findings in this study provide insights about the consequences of an SEC investigation. Corporate managers have a better understanding of how an SEC enforcement action is likely to result in an audit fee premium in subsequent years. Also, the results provide auditors with some benchmarking data related to the impact of SEC enforcement actions.

Social implications

The results highlight potential consequences of fraudulent accounting practices in the market for audit services.

Originality/value

This study is the first one that investigates the effects of SEC enforcement actions on subsequent audit fees.

Citation

Barua, A. and Smith, A.L. (2013), "SEC enforcement releases and audit fees", Managerial Auditing Journal, Vol. 28 No. 2, pp. 161-177. https://doi.org/10.1108/02686901311284559