Professor Michael Maher
Professor Michael Maher and his co-author Professor John Lyon of the Melbourne Business School at University of Melbourne, Australia, had their article titled “The Importance of Business Risk in Setting Audit Fees: Evidence from Cases of Client Misconduct” published in the March 2005 issue of Journal of Accounting Research. The authors extend the literature on litigation and audit fees by analyzing cases that involve business misconduct more generally. Maher and Lyon collected data that included companies’ SEC filing records from 1974-1976, the period when the SEC instituted a voluntary disclosure program requesting companies to report questionable payments to government officials. This period preceded the Foreign Corrupt Practices Act that made paying government officials illegal. Of the companies that filed with the SEC from 1974-1976, some 200 reported making questionable payments and almost all of those did business in developing countries. Additionally, the researchers found that those companies also incurred higher audit fees than their counterparts that did not do business abroad and did not engage in bribery. Other questionable acts that caused higher auditing fees included paying low wages to local employees and engaging in environmental degradation. In most instances these practices were legal in the host country and in the case of baksheesh it was an expected part of doing business. Regardless of cultural expectations in the host country, Maher and Lyon conclude that auditors charge higher fees to companies that engage in misconduct as they are seen as more risky. Their research also shows that auditors are concerned about misconduct more generally and do not base their fee increases solely on a higher risk of litigation.
Professor Maher recently gave a related talk titled “The Lack of Accountability and the Loss of Trust in Corporate America” at the University of Notre Dame’s Mendoza College of Business.