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    Non-Timely 10-K Filings and Audit Fees
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
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    Title:
    Non-Timely 10-K Filings and Audit Fees
    Practical Implications:

    A practical implication from the findings for public companies is that as they consider the costs associated with non-timely filings, they also need to include in their calculations future costs arising from heightened risk assessment by auditors. The results also highlight the fact that there are significant differences in the market for audit services of accelerated and non-accelerated firms, and reinforce the view that there are differences between the two types of firms in terms of the consequences associated with internal control weaknesses.

    For more information on this study, please contact Kannan Raghunandan (raghu@fiu.edu).

    Citation:

    Wang, C., K. Raghunandan, and R. A. McEwen. 2013. Non-Timely 10-K filings and audit fees. Accounting Horizons 27 (4): 737-756

    Keywords:
    Late filings, Client acceptance and continuance, Audit fees.
    Purpose of the Study:

    The SEC has long been concerned about the need for the timely disclosure of information, and requires that registrants that are unable to file annual or quarterly statements by the applicable deadlines file a notice of non-timely filings (Form NT filings) with the Commission. Section 409 of SOX Act mandated that the SEC require registrants to disclose information “on a rapid and current basis.” Subsequently, the SEC acted to reduce the time permitted for registrants to file annual and quarterly statements with the Commission. 

    This paper examines the association between Form NT-10K filings and audit fees.  The authors argue that after an NT-10K filing auditors would have reduced confidence in the systems and processes behind the collection of information underlying client financial statements. This in turn will lead auditors to assign a higher risk of material misstatement for such clients; in turn, this would lead to higher levels of audit effort associated with the planned reduction in detection risk. Further, the many possible adverse consequences associated with non-timely filings can also lead to auditors assessing a higher business risk when a client files a Form NT-10K. Taken together, a Form NT-10K filing can be expected to be associated with higher audit fees either because auditors increase the audit effort for such clients or due to a risk premium.

    Design/Method/ Approach:

    The sample includes 11,024 firm-year observations during the years 2007 and 2010. The proportion of late filings is 4.34 percent for accelerated filers (347/7992) and 11.81 percent for non-accelerated filers (358/3032).

    Findings:
    • In the case of accelerated filers, audit fees are 26 (12) percent higher for those firms that had a Form NT-10K filing in the prior (current) year, after controlling for other factors associated with audit fees.
    • Non-timely filings are not associated with significant increases in audit fees for non-accelerated filers; this finding is driven by clients with non-Big 4 auditors.
    Category:
    Client Acceptance and Continuance, Engagement Management
    Sub-category:
    Audit Fee Decisions, Audit Fees & Fee Negotiations