Auditors Respond to Non-Financial Misconduct with Higher Fees and Increased Scrutiny

Recent research by Bidisha Chakrabarty, Michael Hyman, and Gopal V. Krishnan has shed light on how auditors react to non-financial misconduct within corporations. Their study, published in the International Journal of Auditing, utilizes a novel database to track penalties from federal, state, and local agencies for violations not directly related to financial reporting.

The findings reveal that firms with non-financial misconduct pay approximately 6% more in audit fees, averaging about $162,000 more than their counterparts without such violations. This increase in fees is indicative of the heightened audit risks and the need for more thorough scrutiny by auditors when non-financial misconduct is evident.

Additionally, the study finds that companies fined for non-financial misconduct are more likely to receive „going concern opinions,“ which suggest potential doubts about the firm’s ability to continue operating in the foreseeable future. This correlation underscores the serious implications of non-financial misconduct on a firm’s overall health and sustainability.

The research highlights that non-financial misconduct can signal deeper issues within a firm, such as a lax corporate culture or poor „tone at the top,“ which in turn affects how auditors assess risk and determine audit fees. The robust analysis, including propensity score matching and falsification tests, confirms the impact of non-financial misconduct on audit outcomes.

This study contributes significantly to our understanding of the broader economic impact of non-financial violations, demonstrating that the consequences extend beyond immediate penalties and affect audit practices and perceptions of financial health. It’s a stark reminder for firms to maintain high ethical standards across all areas of operation, not just those directly tied to financial reporting.