Cybersecurity risks disclosure and implied audit risks: Evidence from audit fees

Thomas G. Calderon · Lei Gao

79 citations0/0 files storedInternational Journal of Auditing

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Auditing, Earnings Management, Governance Information and Cyber Security Corporate Governance and Financial Management

Abstract

This study examines the association between companies' cybersecurity risk disclosures and audit fees. Based on a sample from 2005 to 2018, we find that companies' audit fees are not only influenced by the content (number of words), but also by the language (readability and litigious language) disclosed in their cybersecurity risk disclosures. We extend prior studies and find that audit firms assess audit risks not just by evaluating actual cyber breach incidents, but also the cybersecurity risks disclosures more generally. The implication is that the auditor incorporates into their risk assessments, and accordingly their fee structures, the nature and content of cybersecurity risk disclosures. In general, more readable disclosures can reduce audit fees and perhaps other monitoring costs incurred by SEC registrants.

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References

2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 2008Annual report readability, current earnings, and earnings persistence 2016Textual Analysis in Accounting and Finance: A Survey 2014Measuring Readability in Financial Disclosures 2016Earnings management and annual report readability 2008Evidence on the Audit Risk Model: Do Auditors Increase Audit Fees in the Presence of Internal Control Deficiencies?*2017A plain English measure of financial reporting readability 2010Market Value of Voluntary Disclosures Concerning Information Security1

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