ABSTRACT Prior studies suggest that firms subject to SEC enforcement pay higher audit fees in subsequent years of release. We posit that those firms could have already paid higher audit fees prior to the releases because auditors may perceive the risk that firms committing fraud through their periodical audit and close communication with the top managements, thereby increasing fee premiums in advance. Using a sample of fraud firms manually collected from AAER and LR websites, we find that firms subject to SEC enforcement paid higher audit fees than control firms during and after committing fraud. We further break down the fraud firms into firms sanctioned by the SEC for committing accounting fraud (ACC firms) and firms sanctioned in violation of the Foreign Corruption Practices Act (FCPA firms). We perform our analyses using these two sub‐samples and find that ACC firms pay higher audit fees after committing frauds, while FCPA firm pay higher audit fees before, during and after committing frauds. Importantly, we find that FCPA firms pay lager magnitude audit fee premiums compared to ACC firms. These findings are consistent with the suggestion in previous studies that incentives and consequences for committing accounting fraud and violating FCPA are different. In the additional test, we find that FCPA firms pay significantly higher audit fees than ACC firms, further supporting our finding that FCPA firms face higher audit fee premiums than ACC firms.
Chang et al. (Wed,) studied this question.