La Femme Media Inc.: Identifying and Managing Audit Engagement Risk Factors

La Femme Media Inc. (“La Femme”) is a privately owned Canadian publishing company that produces several small periodicals and a popular women’s monthly magazine. The company’s founder and majority shareholder has announced his plans to retire in the upcoming year with plans to sell his 80 percent share of the company to a minority shareholder who has not taken an active role in the business. Students are required to take on the role of the audit senior and draft a planning memo for the partner outlining the risks associated with this engagement and analyzing all significant audit and accounting issues.     

Audit Committee Financial Expertise,Litigation Risk,and Auditor‐Provided Tax Services*

The Sarbanes‐Oxley Act (SOX) greatly expanded audit committees' oversight responsibilities by requiring that they preapprove all non‐prohibited non‐audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT‐FEs) serve on the audit committee, suggesting that ACT‐FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex ante litigation risk, ACT‐FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by subperiod (2003–2006 vs. 2007–2011) shows that this result is significant only in the second period. ACT‐FEs' differential evaluation of the trade‐off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post‐SOX years.