The impact of internal control of non-financial reporting-related weaknesses on audit fees: does external audit size matter?

Abstract

Abstract This study intends to examine the impact of internal control of non-financial reporting-related weakness on the audit fees of corporations. To pursue the research objectives, two research questions are formalized: (i) How does internal control over non-financial reporting-related weakness (ICW N-FR ) affect audit fees (ADF)?; (ii) What is the effect of external audit size on the link between ICW N-FR and ADF ?. Multiple regression models with 82 listed Jordanian companies from 2014 to 2020 used as the study sample reveal the following findings. Our findings underscore the importance of considering the characteristics of the audit firm when analyzing the relationship between ICW N-FR and audit fees. Companies audited by Big 4 firms may face greater scrutiny and potentially higher fees for ICW N-FR compared to those audited by non-Big 4 firms. While prior studies have explored various factors influencing audit fees and the impact of internal controls on audit costs, this research uniquely delves into the differential effects observed when companies are audited by different categories of audit firms. The study accentuates the significance of impeccable internal controls within non-financial reporting procedures and their far-reaching consequences on audit fees, thereby highlighting the imperative for corporations to give precedence to augmenting their internal control mechanisms.

Keywords

• Internal controls
• Audit fees
• External audit size
• Jordan