An examination of the Relationship between Weakness in Internal Control and Audit Fees with an Emphasis on the Moderating Role of managerial Stock Ownership

Abstract

Internal control is not an event or a specific state of affairs, but a set of accountable and comprehensive actions that penetrate and expand into all activities of the organization. There is an essential fact that the auditor should have full information about internal controls and their weaknesses in general in order to report to the unit as soon as they are observed and dealt with. Also, the weakness in internal controls of the company leads to increased uncertainty and the risk of falsehood in financial reporting. Companies approach higher audit quality to reduce the risk of reporting, which is right in companies with less managerial ownership and motivated by coherent shareholders, in which managers are probably due to the wrong choice of an accounting policy that occurs in the form of opportunistic behavior to serve their interests. Therefore, based on this argument, the purpose of this study was to investigate the effect of managerial ownership on the relationship between the weaknesses of internal controls and audit fees. The statistical sample consists of 86 listed companies of the Tehran Stock Exchange during 2012-2016. The results show that there is a significant relationship between the weaknesses of internal controls and audit fees. Also, low managerial ownership leads to the intensification of the relationship between the weaknesses of internal controls and audit fees. On the other hand, the results show that high managerial ownership leads to a weakening of the relationship between weaknesses of internal controls and audit fees.