Redacted Disclosure and Audit Fees

We examine whether and how redacted disclosure in material contracts is related to the cost of an audit. Prior studies document that redaction of mandatory disclosure affects firms’ operating performance, voluntary disclosure decisions, and various market outcomes due to increased information asymmetry. Auditors do not face this information constraint and can access redacted information with little effort, and thus should not be affected by the redacted disclosure. Our findings show that while redacted disclosure has limited impact on audit effort, auditors do charge higher fees for redacting firms as they perceive redacted disclosure as an indicator of potential business and litigation risk. We also find that the positive relation between redacted disclosure and audit fees is mitigated for firms with a more transparent information environment (i.e., larger firms, firms providing more voluntary disclosure, firms with large customers, and firms with higher institutional ownership). Overall, our results suggest that auditors become more cautious in response to clients’ nondisclosure choices from public filings.