Auditors and Breach Risk

What is it about?

Using a sample of breached firms ranging from 2005-2014, we adapt Houston et al.'s (2005) model to explore how auditors view audit risk related to breach risk. We find that breaches are associated with an increase in fees, but the result is driven by external breaches. Our evidence suggests the presence of board-level risk committees and more active audit committees may help mitigate the breach risk audit fee premium. Additional evidence suggests that both past breach disclosures as well as future disclosures are associated with audit fees. Our study is important as it provides evidence that auditors are concerned with breaches (more specifically external breaches), and that firms can take board level steps to reduce the breach related risks priced by the auditor.

Featured Image