| Summary: | We examine whether the extent of financial statement disaggregation affects the
pricing of audit engagements in the United States. We hypothesize and find that
auditors assess higher engagement risk and charge higher audit fees for clients with
more disaggregated financial statements. We also find that these higher audit fees
are not the result of either increased auditor effort to mitigate detection risk or
heightened inherent and control risks reflected in lower financial reporting quality.
Instead, we document that greater financial statement disaggregation is positively
associated with litigation risk. This result suggests that higher audit fees arise out of
auditors' assessments of heightened client and auditor business risks associated with
litigation. While financial statement disaggregation may have beneficial effects on
the quality of financial information, we document that financial statement
disaggregation can impose costs on firms in terms of higher audit fees and a higher
likelihood of litigation. Our study informs standard setters, firms and auditors as they
debate the costs, benefits and extent of disaggregation to be presented in financial
statements.
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