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Auditor Compensation and Audit Failure: An Empirical Analysis

2003; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.387902

1556-5068

Mukesh Bajaj, Katherine Gunny, Atulya Sarin,

Law, Economics, and Judicial Systems

Record number of audit failures during the recent past has prompted much debate about whether high auditor compensation, especially for nonaudit work, may have led to lax auditing standards. We shed light on this question by comparing auditor compensation for a set of firms in which accounting improprieties were alleged in a shareholder class action lawsuit with a set of matched firms in the same industry and of similar size. Our evidence suggests that auditors were not compensated differently for either their audit or consulting services over the period in which their client was allegedly involved in an accounting fraud. However, for the set of firms with the largest market reaction to the alleged fraud, the nonaudit component of the total fees was significantly higher than comparable firms even after controlling for other known determinants of auditor compensation.