The Effects of Financial Statement Disaggregation on Audit Pricing

Abstract

We examine whether the extent of financial statement disaggregation affects auditors in the pricing of audit engagements. We hypothesize and find that auditors assess higher engagement risk for clients with more disaggregated financial statements and charge these clients higher fees. We also find that the higher audit fees are unlikely to be driven by the higher resource costs of mitigating detection risk or by heightened inherent and control risks that lead to material misstatements. Instead, we find evidence that firms with greater financial statement disaggregation are more likely to face lawsuits for alleged financial misstatements, which suggests that higher audit fees are driven by auditors’ assessments of heightened client and auditor business risks. This study provides evidence that financial statement disaggregation has beneficial effects on the quality of financial information but it can also impose costs on firms in terms of higher audit fees and the greater likelihood of litigation.