Internal Control Reporting and Audit Fees of Non-Accelerated Filers

Recent actions by regulators and legislators reflect the belief that compliance with Section 404 of SOX is quite costly for non-accelerated filers. In this paper, we examine (a) the associations between the presence and remediation of internal control problems and audit fees for non-accelerated filers, and (b) how such associations differ for non-accelerated filers from those for accelerated filers. Using data from fiscal years 2008 and 2009, we find that the audit fee premium for non-accelerated filers disclosing a material weakness in internal controls (a) is significantly lower than the corresponding premium paid by accelerated filers, and (b) declines significantly over time only for the non-accelerated filers. We also examine subsequent remediation of internal control problems and find that in the case of accelerated filers remediating clients pay lower fees compared to clients continuing to report internal control problems; however, such differences are not observed in the case of non-accelerated filers. Overall, our findings suggest that the market for audit services differs significantly for non-accelerated filers than from the audit market for accelerated filers