Whistleblowing Allegations, Audit Fees, and Internal Control Deficiencies∗
YU FLORA KUANG, The University of Melbourne
GLADYS LEE, The University of Melbourne†
BO QIN, The University of Melbourne
ABSTRACT
We investigate whether audit fees and auditors’ opinions on internal controls are associated with whistleblowing allegations externally filed to regulatory agencies. We find that firms subject to whistleblowing allegations have significantly higher audit fees, regardless of the substance of these allegations, whereas an auditor is more likely to issue an adverse opinion on internal controls when the allegation is substantiated, rather than frivolous. Further, our findings suggest that auditors are involved in the auditing of whistleblowing when the allegation is still in an internal stage. We also show that firms subject to external whistleblowing allegations have a lower likelihood of restating financial statements prepared in the allegation year when greater audit effort is made in that year. Our study is among the first to demonstrate the role of auditors in the context of whistleblowing.
Keywords: Whistleblowing; audit risk; audit fees; internal control