Audit Pricing and Internal Control Disclosures Among Non-Accelerated Filers

In this paper we examine the association of audit fees with disclosures regarding internal control effectiveness under Section 302 of the Sarbanes Oxley Act of 2002 (SOX). In contrast to previous studies, we focus on non-accelerated filers, whose eventual compliance with the costly provisions of SOX Section 404 internal control reporting has become a contentious issue. While auditors are not required to test controls under Section 302, we find that companies disclosing Section 302 problems pay higher audit fees, suggesting greater engagement effort and/or a risk premium. Further, our results indicate that fees are adjusted for risk associated with problem severity, but relative risk adjustment does not change between 2003 and 2004. We also find a significant fee increase for clean companies in 2004, although there was no change in regulation for non-accelerated filers in that year. Further examining fee changes from 2003 to 2004, we find that companies remediating internal control problems disclosed in 2003 continue to pay higher fees in 2004, and fees of first-time disclosers in 2004 are significantly higher. Additionally, audit fees are higher for both continuing and new clients of the Big 4, lower for companies switching away from Big 4 firms and unchanged for companies switching to another Big 4 firm