Factors Influencing Audit Fees Of Internal Control Over Financial Reporting

Given the case of Enron, WorldCom and a series of American company financial fraud and false information disclosure, the United States congress enacted the Sarbanes-Oxley act (SOX) in2002with the purpose of strengthening the market supervision of the listed companies as well as protecting investors. SOX404required management submit a management's report on internal control over financial reporting as well as an auditor's attestation on such report. SOX had strengthened the responsibility of the internal control of listed companies in a certain degree, and improved the quality of financial reporting, but it also triggered controversy because of its high executing costs, of which the audit costs was one of the most amount. Numerous studies have shown that, company's audit fees have experienced high increase in the post SOX era, yet few studies analysis the factors influencing audit fees of internal control over financial reporting. The research on the factors influencing SOX audit fees did not distinguish the fees of financial report audit and the fees of internal control over financial reporting audit.The development of internal control audit in China always learns from foreign advanced experience combined on the basis of the situation of our country. Following "The Basic Standards for Enterprise Internal Control", the ministry of finance jointly by five departments released "The Enterprise Internal Control Supporting Guidelines" in April,2010, which starts from the companies listing both at home and abroad since January,2011. So far, the internal control audit in our country was required compulsively. The change of audit fees of the Chinese listing companies in the compulsory audit era deserves special attention.This paper explores the factors influencing audit fees of internal control over financial reporting based on Chinese companies listed in the USA, in the purpose of providing theoretical basis for the internal control audit market pricing and the decision of relevant policy and regulatory measures. This paper use the following method to estimate the audit fees for internal control over financial reporting:first, confirm the year of the sample companies start internal control audit over financial reporting in accordance with the SOX404, then use the margin of the audit fees that year and the audit fees adjusted by firm size of the previous year as the audit fees of internal control over financial reporting. The results support existing research and show new findings. Company size, the complexity of company internal control, the reputation of accounting firm have significant positive correlation with audit fees, and the internal control over financial reporting of company without traditional business process is more complex than the one of company with traditional business process in the view of accounting firm. More importantly, the risk of internal control over financial reporting has significant negative correlation with audit fees because of risk-based audit mode, SOX Act specific rules and properties of internal control, which is different from the common sense of positive correlation. The correlation between audit fees and the risk of internal control over financial reporting will develop in the opposite direction when the information becomes extreme. Based on the research results, this paper provides several suggestions to the audit firms and regulatory agency.