Gary F. Peters

An Empirical Investigation of Audit Fees, Nonaudit Fees, and Audit Committees*

This study examines the association between audit committee characteristics and the ratio of nonaudit service (NAS) fees to audit fees, using data gathered under the Securities and Exchange Commissions (SECs) fee disclosure rules. Issues related to NAS fees have been of concern to practitioners, regulators, and academics for a number of years. Prior research suggests that audit committees possessing certain characteristics are important participants in the process of managing the client†auditor relationship. We hypothesize that audit committees that are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. Our analysis using a sample of 538 firms indicates that audit committees comprised solely of independent directors meeting at least four times annually are significantly and negatively associated with the NAS fee ratio. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease the NAS fee ratio.

The consequences of information technology control weaknesses on management information systems: the case of Sarbanes-Oxley internal control reports

In this article, the association between the strength of information technology controls over management information systems and the subsequent forecasting ability of the information produced by those systems is investigated. The Sarbanes-Oxley Act of 2002 highlights the importance of information system controls by requiring management and auditors to report on the effectiveness of internal controls over the financial reporting component of the firms management information systems. We hypothesize and find evidence that management forecasts are less accurate for firms with information technology material weaknesses in their financial reporting system than the forecasts for firms that do not have information technology material weaknesses. In addition, we examine three dimensions of information technology material weaknesses: data processing integrity, system access and security, and system structure and usage. We find that the association with forecast accuracy appears to be strongest for IT control weaknesses most directly related to data processing integrity. Our results support the contention that information technology controls, as a part of the management information system, affect the quality of the information produced by the system. We discuss the complementary nature of our findings to the information and systems quality literature.

The effect of auditor IT expertise on internal controls

Material weaknesses in internal controls related to information technology (IT) represent unique threats to organizations. Utilizing the external auditor as an example of an externally observable governance mechanism, we investigate if firms with revealed IT internal control deficiencies employ a strategy of disassociation with their current auditor. Our tests show that prior evidence of disassociation strategies hold in both IT and non-IT contexts. Of particular focus to our study, we document a positive association between firms that report IT material weaknesses and subsequent auditor dismissals or switching. We next investigate the potential internal control benefits of switching to auditors with greater expertise in environments that emphasize the importance of IT. We argue that greater audit firm IT expertise promotes improved internal controls for their clients, especially those controls that are dependent on IT. We find that clients that switch to auditors with greater IT expertise, relative to their former auditor, have a greater likelihood of material weakness remediation within one year of reporting control weaknesses. Complementing these findings, we find that audit IT expertise is negatively associated with both non-IT and IT material weaknesses in an ex ante reporting setting. Prior literature takes a longstanding interest in both the incentive for developing auditor expertise and the effects of that expertise. We contribute to this literature stream by providing additional evidence related to a specific type of expertise.

THE EFFECTS OF POST-BANKRUPTCY FINANCING ON GOING CONCERN REPORTING

Abstract We examine whether auditors appear to use information related to client debtor-in-possession (DIP) financing in the going concern decision. DIP financing consists of post-bankruptcy financing which is positively associated with bankruptcy emergence. Statement on Auditing Standards No. 59 (SAS 59) directs auditors’ attention to debt restructuring to mitigate financial distress. Accordingly, we hypothesize that auditors interpret DIP financing as a mitigating factor and are thus less likely to modify the audit opinions of firms receiving DIP financing. We find that auditors are less likely to issue a modification for clients receiving DIP financing, consistent with auditors treating its receipt as a mitigating factor in the going concern decision.