Keywords

auditors, audit fees, fraud risk, risk assessment, short sellers, short interest, SAS 99

Abstract

Motivated by evidence from the empirical accounting and finance literatures suggesting that short sellers target firms with suspect financial reporting, we investigate whether short interest provides a signal of the degree of audit risk. We find a positive association between audit fees and short interest (total shares sold short scaled by total shares outstanding) after controlling for other determinants of audit fees. This finding suggests that short interest is an indicator of audit risk that reflects information not captured by traditional client risk measures. We also find an increase in the magnitude of the association between audit fees and short interest after events in the early 2000s (corporate scandals, the collapse of Arthur Andersen, and the implementation of new auditing standards) which increased auditors’ responsibilities to deter fraud and made the implications of fraud particularly salient to external auditors. Our findings are important because they suggest that auditors’ sensitivity to client risk information increased post-2002, indicating that efforts by regulators and standard setters (e.g., the PCAOB and the AICPA) to increase auditors’ attention to risk have been successful.

Original Publication Citation

Cassell, Cory A. and Drake, Michael S. and Rasmussen, Stephanie J., Short Interest as a Signal of Audit Risk. Contemporary Accounting Research 28 (4), 2011. Available at SSRN: https://ssrn.com/abstract=1695996

Document Type

Peer-Reviewed Article

Publication Date

2011

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

Download

Included in

Accounting Commons

Share

COinS