Does insider trading affect auditors’ risk assessments and effort? Evidence from audit pricing

Purpose Audit regulations suggest that auditors consider insider trading as part of their assessment of and response to the risk of material misstatement as insider trading provides information about audit-relevant outcomes such as weak internal controls and fraud. The authors investigate whether audit fees reflect the increased risk revealed and more audit effort induced by insider selling. Design/methodology/approach This study uses empirical analysis with OLS. Findings The authors find that relative to companies with net insider buying, audit fees are higher among companies with net insider selling, especially when the insiders are officers. In addition, the authors find more audit effort is needed when a large, accelerated filer changes to a net insider seller. We further find that the value of total insider purchase is negatively related to audit fees among companies of net insider buying. Originality/value Collectively, the findings suggest that auditors’ risk assessments and effort are sensitive to information reflected in insider trading, consistent with regulatory recommendations for auditors to consider nontraditional risk characteristics.