Abhijit Barua

SEC enforcement releases and audit fees

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 SECs 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.

Classification Shifting and Special Items: Evidence of Earnings Management or a Research Design Consequence?

McVay (2006, 2008) report compelling evidence that firms reclassify ordinary expense items as special item in order to boost benchmark core earnings numbers. We show that another far more innocuous explanation exists for this evidence. The effects that McVay attributes to classification shifting activities can arise as an artifact of the approaches used in deriving expected core earnings values. This can happen because expected core earnings and expected change in core earnings values are determined, in part, by special item accruals. When we focus on either subsamples where this special item accrual effect on the expected core earnings values is a priori expected to be small or incorporate controls for it into the analysis, there is no reliable evidence of widespread classification shifting activities by managers.