The Impact of Client Information Technology Capability on Audit Pricing

Abstract

This paper explores the question: “How does a client’s information technology (IT) capability influence audit pricing?” Company data from 2004 to 2012 is employed. Firms appearing on the InformationWeek 500 (IW 500) yearly list of U.S. organizations with superior IT functions, serve as a proxy for companies with superior IT capability. Our findings suggest that companies with superior IT capability incur higher levels of audit fees. These findings contrast with prior research by Chen et al. (2014) that found in the immediate post-Sarbanes-Oxley Act (SOX) period, 2004-2007, client IT capability reduced audit fee increases. We replicate the Chen et al. (2014) results and find that the observed effect attenuated during the subsequent recession and recovery periods. These results suggest a revised interpretation of Chen et al. (2014) may be warranted. It appears that clients with superior IT capability incur on average higher levels of audit fees than companies with less advanced IT; they are better positioned to adapt to external shocks, such as, SOX regulations. Therefore, these clients also see smaller audit fee increases when these exogenous events occur. This study contributes to prior literature by providing a more complete picture of how client IT capability affects audit fees.