Misclassification of audit-related fees as a measure of internal control quality |
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| Institution: | 1. E.J. Ourso College of Business, Louisiana State University, Baton Rouge, LA 70803, United States of America;2. Department of Accounting, University of New Orleans, New Orleans, LA 70148, United States of America;1. Binghamton University – SUNY, USA;2. The Ohio State University, USA;1. Department of Accounting, College of Business Administration, University of Texas at San Antonio, San Antonio, TX 78249, United States;2. Gerald W. Schlief School of Accountancy, Stephen F. Austin State University, Nacogdoches, TX 75962, United States;1. Collins College of Business, University of Tulsa, United States of America;2. Crummer Graduate School of Business, Rollins College, United States of America;3. Saunders College of Business, Rochester Institute of Technology, United States of America;1. Florida International University, United States of America;2. University at Albany – SUNY, United States of AmericaThis article was accepted by Roger Graham;1. Department of Accounting, College of Business and Management, Tamkang University, Taiwan R.O.C;2. Department of Business Administration, College of Management, National Changhua University of Education, Taiwan R.O.C;3. College of Business Administration and Public Policy, California State University—Dominguez Hills, United States;4. College of Business Administration, California State University—Stanislaus, One University Circle, United States;1. Department of Accounting, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92831, USA;2. Department of Accounting and Legal Studies, Perdue School of Business, Salisbury University, Salisbury, MD 21801, USA;3. School of Business, Norfolk State University, Norfolk, VA 23504, USA |
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| Abstract: | There is an abundance of literature examining the effects of a poor internal control system on financial reporting quality, decision-making and auditing. However, the most commonly used proxy for internal control quality (i.e., a material weakness in the internal controls over financial reporting) occurs relatively infrequently and has declined in occurrence over the past decade (Chasan, 2013). In this study, we attempt to develop an alternative measure for internal control quality using the information reported in the S K portion of a firm's 10-K. We suggest that a misclassification of audit-related fees in the unaudited disclosures of the annual report is a proxy for low internal control quality. Consistent with lower internal control quality, we find that firms misclassifying audit-related fees are more likely to report a material weakness, are less timely filers (longer report lag) and pay higher audit fees. Our findings suggest that misclassification of audit-related fees correlate with having poor internal control quality. |
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